Edgar Filing: MB FINANCIAL INC /MD

09.30.14 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-36599

MB FINANCIAL, INC.

(Exact name of registrant as specified in its charter)



Maryland		36-4460265
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

800 West Madison Street, Chicago, Illinois		60607
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (888) 422-6562

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer x		Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

There were issued and outstanding 74,767,180 shares of the Registrant’s common stock as of November 10, 2014.

MB FINANCIAL, INC. AND SUBSIDIARIES

FORM 10-Q

September 30, 2014

INDEX



		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Comprehensive Income	6
	Consolidated Statements of Changes in Stockholders’ Equity	7
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	53
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	74
Item 4.	Controls and Procedures	77

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	78
Item 1A.	Risk Factors	79
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	81
Item 6.	Exhibits	81
	Signatures	82

PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands, except common share data)



	(Unaudited)
	September 30, 2014			December 31, 2013
ASSETS
Cash and due from banks	$	267,405		$	205,193
Interest earning deposits with banks	179,391			268,266
Total cash and cash equivalents	446,796			473,459
Federal funds sold	—			42,950
Investment securities:
Securities available for sale, at fair value	1,758,650			1,118,912
Securities held to maturity, at amortized cost ($1.0 billion fair value at September 30, 2014 and $1.2 billion at December 31, 2013)	1,005,349			1,182,533
Non-marketable securities - FHLB and FRB stock	75,569			51,417
Total investment securities	2,839,568			2,352,862
Loans held for sale	553,627			629
Loans:
Total loans, excluding purchased credit impaired and covered loans	8,710,060			5,476,831
Purchased credit impaired including covered loans	272,957			235,720
Total loans	8,983,017			5,712,551
Less: Allowance for loan losses	102,810			111,746
Net loans	8,880,207			5,600,805
Lease investment, net	137,120			131,089
Premises and equipment, net	244,314			221,065
Cash surrender value of life insurance	132,697			130,181
Goodwill	698,946			423,369
Other intangibles	44,544			23,428
Mortgage servicing rights, at fair value	249,376			413
Other real estate owned, net	19,179			23,289
Other real estate owned related to FDIC-assisted transactions	22,028			20,472
Other assets	237,641			197,416
Total assets	$	14,506,043		$	9,641,427
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest bearing	$	3,807,554		$	2,375,863
Interest bearing	7,430,994			5,005,396
Total deposits	11,238,548			7,381,259
Short-term borrowings	667,160			493,389
Long-term borrowings	77,269			62,159
Junior subordinated notes issued to capital trusts	185,681			152,065
Accrued expenses and other liabilities	346,017			225,873
Total liabilities	12,514,675			8,314,745
STOCKHOLDERS’ EQUITY
Preferred stock, ($0.01 par value, authorized 10,000,000 shares at September 30, 2014 and 1,000,000 at December 31, 2013; Series A, 8% perpetual non-cumulative, 4,000,000 shares issued and outstanding at September 30, 2014 and no shares outstanding at December 31, 2013, $25 liquidation value)	115,280			—
Common stock, ($0.01 par value; authorized 100,000,000 shares at September 30, 2014 and 70,000,000 at December 31, 2013; issued 75,054,114 shares at September 30, 2014 and 55,148,409 shares at December 31, 2013)	751			551
Additional paid-in capital	1,256,050			738,053
Retained earnings	606,097			581,998
Accumulated other comprehensive income	18,431			8,383
Less: 290,409 and 184,173 shares of treasury stock, at cost, at September 30, 2014 and December 31, 2013, respectively	(6,692		)	(3,747		)
Controlling interest stockholders’ equity	1,989,917			1,325,238
Noncontrolling interest	1,451			1,444
Total stockholders’ equity	1,991,368			1,326,682
Total liabilities and stockholders’ equity	$	14,506,043		$	9,641,427

See Accompanying Notes to Consolidated Financial Statements.

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share and per share data) (Unaudited)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Interest income:
Loans:
Taxable	$	79,902		$	57,324		$	187,497		$	173,217
Nontaxable	2,265			2,791			6,819			7,272
Investment securities:
Taxable	11,028			6,330			27,968			18,749
Nontaxable	9,041			8,175			25,393			24,399
Federal funds sold and other interest earning accounts	225			200			624			429
Total interest income	102,461			74,820			248,301			224,066
Interest expense:
Deposits	4,615			4,433			12,138			15,274
Short-term borrowings	231			112			426			395
Long-term borrowings and junior subordinated notes	2,003			1,367			4,725			4,324
Total interest expense	6,849			5,912			17,289			19,993
Net interest income	95,612			68,908			231,012			204,073
Provision for credit losses	3,109			(3,304		)	2,309			(2,804		)
Net interest income after provision for credit losses	92,503			72,212			228,703			206,877
Non-interest income:
Lease financing, net	17,719			14,070			45,768			45,435
Mortgage banking revenue	16,823			177			17,069			1,322
Commercial deposit and treasury management fees	9,345			6,327			23,595			18,322
Trust and asset management fees	5,712			4,799			16,324			14,167
Card fees	3,836			2,745			9,841			8,175
Capital markets and international banking fees	1,472			972			3,810			2,719
Consumer and other deposit service fees	3,362			3,648			9,453			10,487
Brokerage fees	1,145			1,289			3,826			3,680
Loan service fees	1,069			1,427			2,950			4,349
Increase in cash surrender value of life insurance	855			851			2,516			2,537
Net (loss) gain on investment securities	(3,246		)	1			(3,016		)	14
Net loss on sale of assets	(7		)	—			(24		)	—
Gain on extinguishment of debt	1,895			—			1,895			—
Other operating income	1,107			1,401			3,620			4,142
Total non-interest income	61,087			37,707			137,627			115,349
Non-interest expenses:
Salaries and employee benefits	79,492			44,918			170,491			132,341
Occupancy and equipment expense	11,742			8,797			30,852			27,609
Computer services and telecommunication expense	11,506			4,870			21,669			13,374
Advertising and marketing expense	2,235			1,917			6,537			6,187
Professional and legal expense	8,864			3,102			12,210			5,750
Other intangibles amortization expense	1,470			1,513			3,884			4,595
Net loss (gain) recognized on other real estate owned and other related expense	2,178			1,031			3,289			(322		)
Other operating expenses	24,714			10,117			47,346			28,413
Total non-interest expenses	142,201			76,265			296,278			217,947
Income before income taxes	11,389			33,654			70,052			104,279
Income tax expense	4,488			9,254			20,076			29,680
Net income	6,901			24,400			49,976			74,599
Dividends on preferred shares	2,000			—			2,000			—
Net income available to common stockholders	$	4,901		$	24,400		$	47,976		$	74,599

See Accompanying Notes to Consolidated Financial Statements.

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS - (Continued)

(Amounts in thousands, except share and per share data) (Unaudited)



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Common share data:
Basic earnings per common share	$	0.08	$	0.45	$	0.83	$	1.37
Diluted earnings per common share	0.08		0.44		0.82		1.36
Weighted average common shares outstanding for basic earnings per common share	63,972,902		54,565,089		57,795,094		54,471,541
Diluted weighted average common shares outstanding for diluted earnings per common share	64,457,978		55,130,653		58,341,927		54,912,352

See Accompanying Notes to Consolidated Financial Statements.

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in thousands) (Unaudited)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013

Net income	$	6,901		$	24,400		$	49,976		$	74,599
Unrealized holding gains (losses) on investment securities, net of reclassification adjustments	5,589			(6,097		)	16,089			(42,470		)
Reclassification adjustment for amortization of unrealized gains on investment securities transferred to held to maturity from available for sale	106			(1,008		)	(2,509		)	(1,008		)
Reclassification adjustments for losses (gains) included in net income	3,246			(1		)	3,016			(14		)
Other comprehensive income (loss), before tax	8,941			(7,106		)	16,596			(43,492		)
Income tax (expense) benefit related to items of other comprehensive income (loss)	(3,544		)	2,791			(6,548		)	17,084
Other comprehensive income (loss), net of tax	5,397			(4,315		)	10,048			(26,408		)
Comprehensive income	$	12,298		$	20,085		$	60,024		$	48,191

See Accompanying Notes to Consolidated Financial Statements.

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2014 and 2013

(Amounts in thousands, except per share data) (Unaudited)



	Preferred Stock		Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss), Net of Tax			Treasury Stock			Noncontrolling Interest			Total Stock- holders’ Equity
Balance at December 31, 2012	$	—	$	550	$	732,771		$	507,933		$	36,326		$	(3,293	)	$	1,483		$	1,275,770
Net income	—		—		—			74,599			—			—			137			74,736
Other comprehensive loss, net of tax	—		—		—			—			(26,408		)	—			—			(26,408		)
Cash dividends declared on common shares ($0.32 per share)	—		—		—			(17,653		)	—			—			—			(17,653		)
Restricted common stock activity, net of tax	—		1		(757		)	(100		)	—			1,725			—			869
Stock option activity, net of tax	—		—		117			—			—			499			—			616
Repurchase of common shares in connection with
employee benefit plans and held in trust for
deferred compensation plan	—		—		303			—			—			(2,456		)	—			(2,153		)
Stock-based compensation expense	—		—		3,860			—			—			—			—			3,860
Distributions to noncontrolling interest	—		—		—			—			—			—			(169		)	(169		)
Balance at September 30, 2013	$	—	$	551	$	736,294		$	564,779		$	9,918		$	(3,525	)	$	1,451		$	1,309,468

Balance at December 31, 2013	$	—	$	551	$	738,053		$	581,998		$	8,383		$	(3,747	)	$	1,444		$	1,326,682
Net income	—		—		—			49,976			—			—			220			50,196
Other comprehensive income, net of tax	—		—		—			—			10,048			—			—			10,048
Issuance of preferred stock	115,280		—		—			—			—			—			—			115,280
Issuance of common stock due to business combination	—		196		509,796			—			—			—			—			509,992
Cash dividends declared on preferred shares	—		—		—			(2,000		)	—			—			—			(2,000		)
Cash dividends declared on common shares ($0.38 per share)	—		—		—			(23,877		)	—			—			—			(23,877		)
Restricted common stock activity, net of tax	—		2		753			—			—			60			—			815
Stock option activity, net of tax	—		2		483			—			—			—			—			485
Repurchase of common shares in connection with
employee benefit plans and held in trust for
deferred compensation plan	—		—		372			—			—			(3,005		)	—			(2,633		)
Stock-based compensation expense	—		—		6,593			—			—			—			—			6,593
Distributions to noncontrolling interest	—		—		—			—			—			—			(213		)	(213		)
Balance at September 30, 2014	$	115,280	$	751	$	1,256,050		$	606,097		$	18,431		$	(6,692	)	$	1,451		$	1,991,368

See Accompanying Notes to Consolidated Financial Statements.

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands) (Unaudited)



	Nine Months Ended
	September 30,
	2014			2013
Cash Flows From Operating Activities
Net income	$	49,976		$	74,599
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment	14,088			13,165
Depreciation of leased equipment	28,557			24,933
Compensation expense for restricted stock awards	5,436			3,013
Compensation expense for stock option grants	1,157			847
Net (gain) loss on sales of premises and equipment and leased equipment	(1,612		)	(192		)
Amortization of other intangibles	3,884			4,595
Provision for credit losses	2,309			(2,804		)
Deferred income tax expense	22,192			13,067
Amortization of premiums and discounts on investment securities, net	33,661			35,364
Accretion of premiums and discounts on loans, net	(8,350		)	(5,462		)
Accretion of FDIC indemnification asset	(92		)	(307		)
Net loss (gain) on investment securities	3,016			(14		)
Proceeds from sale of loans held for sale	873,877			74,395
Origination of loans held for sale	(745,677		)	(66,667		)
Net gain on sale of loans held for sale	(7,285		)	(1,322		)
Change in fair value of mortgage servicing rights	(7,517		)	—
Net gain on sales of other real estate owned	(835		)	(977		)
Fair value adjustments on other real estate owned	2,509			(80		)
Net (gain) loss on sales of other real estate owned related to FDIC-assisted transactions	473			163
Increase in cash surrender value of life insurance	(2,516		)	(2,537		)
Decrease in other assets, net	61,370			30,976
Decrease in other liabilities, net	(46,942		)	(68,428		)
Net cash provided by operating activities	281,679			126,327
Cash Flows From Investing Activities
Decrease (increase) in federal funds sold	42,950			(47,500		)
Proceeds from sales of investment securities available for sale	463,306			989
Proceeds from maturities and calls of investment securities available for sale	195,219			415,780
Purchases of investment securities available for sale	(204,274		)	(364,550		)
Proceeds from maturities and calls of investment securities held to maturity	28,338			5,079
Purchases of investment securities held to maturity	(116,973		)	(55,409		)
Purchases of non-marketable securities - FHLB and FRB stock	(15		)	—
Redemption of non-marketable securities - FHLB and FRB stock	26,483			4,515
Net decrease in loans	255,979			170,586
Purchases in mortgage servicing rights	(489		)	—
Purchases of premises and equipment	(15,925		)	(11,342		)
Purchases of leased equipment	(30,440		)	(18,359		)
Proceeds from sales of leased equipment	7,499			6,672
Capital improvements on other real estate owned	—			(53		)
Proceeds from sale of other real estate owned	8,390			12,791
Proceeds from sale of other real estate owned related to FDIC-assisted transactions	11,022			7,535
Principal paid on lease investments	—			(1,127		)
Life insurance death benefit	—			2,083
Net cash acquired in business acquisition	34,174			—
Net proceeds from FDIC related covered assets	(189		)	11,347
Net cash provided by investing activities	705,055			139,037
Cash Flows From Financing Activities
Net decrease in deposits	(95,924		)	(244,011		)
Net (decrease) increase in short-term borrowings	(862,029		)	19,998
Proceeds from long-term borrowings	23,940			5,457
Principal paid on long-term borrowings	(8,830		)	(59,079		)
Redemption of junior subordinated notes issued to capital trusts	(45,369		)	—
Treasury stock transactions, net	(2,633		)	(1,653		)
Stock options exercised	902			1,014
Excess tax expense (benefits) from share-based payment arrangements	316			(402		)
Dividends paid on common stock	(23,770		)	(17,514		)
Net cash used in financing activities	(1,013,397		)	(296,190		)
Net decrease in cash and cash equivalents	$	(26,663	)	$	(30,826	)
Cash and cash equivalents:
Beginning of period	473,459			287,543
End of period	$	446,796		$	256,717

MB FINANCIAL, INC. & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)

(Amounts in Thousands) (Unaudited)



	Nine Months Ended
	September 30,
	2014		2013
Supplemental Disclosures of Cash Flow Information:
Cash payments for:
Interest paid to depositors and other borrowed funds	$	15,911	$	20,913
Net income tax payments, net	17,300		35,141
Supplemental Schedule of Noncash Investing Activities:
Investment securities available for sale purchased not settled	$	—	$	1,797
Transfer of investment securities available for sale to investment securities held to maturity	—		656,617
Transfer of investment securities held to maturity to investment securities available for sale	273,471		—
Loans transferred to other real estate owned	872		6,060
Loans transferred to other real estate owned related to FDIC-assisted transactions	13,179		11,580
Loans transferred to repossessed vehicles	609		606
Operating leases rewritten as direct finance leases included as loans	4,696		6,541
Supplemental Schedule of Noncash Investing Activities From Acquisitions:
Noncash assets acquired:
Investment securities available for sale	$	826,691	$	—
Investment securities held to maturity	22,599		—
Non-marketable securities - FHLB and FRB stock	50,620		—
Loans held for sale	670,671		—
Loans	3,539,304		—
Lease investments	11,885		—
Premises and equipment	20,201		—
Goodwill	275,577		—
Core deposit intangible	25,000		—
Mortgage servicing rights	232,439		—
Other real estate owned	5,082		—
Other assets	113,266		—
Total noncash assets acquired	$	5,793,335	$	—
Liabilities assumed:
Deposits	$	3,953,213	$	—
Short-term borrowings	1,035,800		—
Junior subordinated notes issued to capital trusts	80,843		—
Other liabilities	123,103		—
Total liabilities assumed	$	5,192,959	$	—

See Accompanying Notes to Consolidated Financial Statements.

MB FINANCIAL, INC. & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1.	Basis of Presentation

These unaudited consolidated financial statements include the accounts of MB Financial, Inc., a Maryland corporation (the “Company”), and its subsidiaries, including its wholly owned national bank subsidiary, MB Financial Bank, N.A. (“MB Financial Bank”), based in Chicago, Illinois. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been made. The results of operations for the three months and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the entire fiscal year.

These unaudited interim financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and industry practice. Certain information in footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP and industry practice has been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods. Actual results could differ from those estimates.

Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications did not result in any changes to previously reported net income or stockholders’ equity.


Note 2.	New Authoritative Accounting Guidance

ASC Topic 740 “Income Taxes.” New authoritative accounting guidance under ASC Topic 740, “Income Taxes” amended prior guidance to include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The Company adopted this new authoritative guidance on January 1, 2014, and it did not have an impact on the Company's statements of operations or financial condition.

ASC Topic 310 “Receivables.” New authoritative accounting guidance under ASC Topic 310, “Receivables” amended prior guidance to clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical

possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosures. The new authoritative guidance will be effective for reporting periods after January 1, 2015 and is not expected to have an impact on the Company's statements of operations or financial condition.

ASC Topic 323 “Investments - Equity Method and Joint Ventures.” New authoritative accounting guidance under ASC Topic 323, “Investments - Equity Method and Joint Ventures” amended prior guidance to permit entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the statement of operation as a component of income tax expense. The new authoritative guidance will be effective for reporting periods after January 1, 2015 and is not expected to have a significant impact impact on the Company's statements of operations or financial condition.

ASC Topics 205 “Presentation of Financial Statements” and 360 “Property, Plant, and Equipment.” New authoritative accounting guidance under ASC Topic 205, “Presentation of Financial Statements” and ASC Topic 360 “Property, Plant, and Equipment”

amended prior guidance to change the requirements for reporting discontinued operations. The disposal of a component of an entity or group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. The new authoritative guidance also requires additional disclosures about discontinued operations. The new authoritative guidance will be effective for reporting periods after January 1, 2015 and is not expected to have an impact on the Company's statements of operations or financial condition.

ASC Topic 860 “Transfers and Servicing.” New authoritative accounting guidance under ASC Topic 860, “Transfers and Servicing” amended prior guidance to change the accounting for repurchase-to-maturity transactions to secured borrowing accounting and to require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The new authoritative guidance also requires disclosures for a transfer of a financial asset accounted for as a sale and an agreement with the same transferee entered into in contemplation of the initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. The new authoritative guidance will be effective for reporting periods after January 1, 2015, and the Company is assessing the impact on the statements of operations and financial condition.

ASC Topic 718 “Compensation - Stock Compensation.” New authoritative accounting guidance under ASC Topic 718, “Compensation - Stock Compensation” amended prior guidance to require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The new authoritative guidance will be effective for reporting periods after January 1, 2015 and is not expected to have an impact on the Company's statements of operations or financial condition.


Note 3.	Earnings Per Common Share

Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include non-vested restricted stock awards and restricted stock units, though no actual shares of common stock related to restricted stock units are issued until the settlement of such units, to the extent holders of these securities receive non-forfeitable dividends or dividend equivalents at the same rate as holders of the Company's common stock. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.

The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share (amounts in thousands, except share and per share data).



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2014			2013		2014		2013
Distributed earnings allocated to common stock	$	10,545		$	6,636	$	23,877	$	17,653
Undistributed (loss) earnings	(3,644		)	17,764		26,099		56,946
Net income	6,901			24,400		49,976		74,599
Less: preferred stock dividends and discount accretion	2,000			—		2,000		—
Net income available to common stockholders	4,901			24,400		47,976		74,599
Less: earnings allocated to participating securities	—			1		1		2
Earnings allocated to common stockholders	$	4,901		$	24,399	$	47,975	$	74,597
Weighted average shares outstanding for basic earnings per common share	63,972,902			54,565,089		57,795,094		54,471,541
Dilutive effect of equity awards	485,076			565,564		546,833		440,811
Weighted average shares outstanding for diluted earnings per common share	64,457,978			55,130,653		58,341,927		54,912,352
Basic earnings per common share	$	0.08		$	0.45	$	0.83	$	1.37
Diluted earnings per common share	0.08			0.44		0.82		1.36


Note 4.	Business Combination

On August 18, 2014, the Company acquired Taylor Capital Group, Inc. (“Taylor Capital”), a bank holding company and the parent company of Cole Taylor Bank, a commercial bank headquartered in Chicago, through the merger (the “Merger”) of Taylor Capital with and into the Company, followed immediately by the merger of Cole Taylor Bank with and into MB Financial Bank. This transaction solidifies the Company's market position in Chicago and diversifies its revenue streams. At the effective time of the Merger (the “Effective Time”), each share of the common stock of Taylor Capital and each share of nonvoting convertible preferred stock of Taylor Capital converted into the right to receive (1) 0.64318 of a share of the common stock of the Company, and (2) $4.08 in cash. All “in-the-money” Taylor Capital stock options and warrants outstanding immediately prior to the Effective Time were canceled in exchange for the right to receive a cash payment as provided in the merger agreement, as were the outstanding unvested restricted stock awards of Taylor Capital; however, the cash consideration payable for such restricted stock awards will remain subject to vesting or other lapse restrictions. Each share of Taylor Capital’s perpetual non-cumulative preferred stock, Series A, converted into the right to receive one share of the Company’s perpetual non-cumulative preferred stock, Series A.

The Company issued approximately 19.6 million shares of common stock and paid approximately $120.5 million in cash in the Merger. For the “in-the-money” Taylor Capital stock options and warrants, the Company paid in the aggregate approximately $4.4 million in cash. For the outstanding unvested Taylor Capital restricted stock awards, the Company will pay or has paid in the aggregate up to approximately $3.7 million in cash, as and to the extent such awards vest. The $120.5 million cash consideration includes payments for the Taylor Capital stock options, warrants and restricted stock awards.

This business combination was accounted for under the acquisition method of accounting. Accordingly, the results of operations of the acquired company have been included in the Company’s results of operations since the date of acquisition. Under this method of accounting, assets and liabilities acquired are recorded at their estimated fair values. The excess cost over fair value of net assets acquired is recorded as goodwill. In the event that the fair value of net assets acquired exceeds the cost, the Company will record a gain on the acquisition. As the consideration paid for Taylor Capital exceeded the net assets acquired, goodwill of $275.6 million was recorded on the acquisition. Goodwill will be allocated to our operating segments upon further analysis. Goodwill recorded in the transaction, which reflects the increased Chicago market share and related synergies expected from the combined operations, is not tax deductible. The amounts recognized in the financial statements for the business combination have been determined only provisionally as of the third quarter of 2014.

Estimated fair values of the assets acquired and liabilities assumed in the Taylor Capital transaction, as of the closing date of the transaction were as follows (in thousands):



	August 18,
	2014
ASSETS
Cash and cash equivalents	$	154,684
Investment securities available for sale	826,691
Investment securities held to maturity	22,599
Non-marketable securities - FRB and FHLB Stock	50,620
Loans held for sale	670,671
Loans	3,539,304
Leases investments, net	11,885
Premises and equipment	20,201
Goodwill	275,577
Core deposit intangible	25,000
Mortgage servicing rights	232,439
Other real estate owned	5,082
Other assets	113,266
Total assets	$	5,948,019
LIABILITIES
Deposits	$	3,953,213
Short-term borrowings	1,035,800
Junior subordinated notes issued to capital trusts	80,843
Accrued expenses and other liabilities	123,103
Total liabilities	$	5,192,959
Series A preferred stock at $28.82 per share at August 15, 2014	$	115,280
Total identifiable net assets less Series A preferred stock	$	639,780

Consideration excluding Series A preferred stock:
Market value of common stock at $26.49 per share at August 15, 2014 (19,602,482 shares of common stock issued)	$	519,270
Cash paid, net	120,510
Total fair value of consideration, excluding Series A preferred stock	$	639,780

The Company's Series A preferred stock was valued based upon the closing price of Taylor Capital's Series A preferred stock on August 15, 2014, the last trading day before the merger date.

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date without a carryover of the related allowance for loan losses. These acquired loans are segregated into three types: pass rated loans with no discount attributable to credit quality, non-impaired loans with a discount attributable at least in part to credit quality and impaired loans with evidence of significant credit deterioration.


•	Pass rated loans (typically performing loans) are accounted for in accordance with ASC 310-20 "Nonrefundable Fees and Other Costs" as these loans do not have evidence of credit deterioration since origination.


•	Non-impaired loans (typically performing substandard loans) are accounted for in accordance with ASC 310-30 if they display at least some level of credit deterioration since origination.


•	Impaired loans (typically substandard loans on non-accrual status) are accounted for in accordance with ASC 310-30 as they display significant credit deterioration since origination.

For pass rated loans (non-purchased credit-impaired loans), the difference between the estimated fair value of the loans (computed on a loan by loan basis) and the principal outstanding is accreted over the remaining life of the loans. We anticipate recording a provision for the acquired portfolio in future quarters related to renewing Taylor Capital loans which will largely offset the accretion from the pass rated loans.

In accordance with ASC 310-30, for both purchased non-impaired loans and purchased impaired loans ("PCI loans"), the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

The following table presents the acquired loans as of the acquisition date (in thousands):



	PCI Loans			Non-PCI Loans
Contractually required principal and interest payments	$	217,415		$	3,696,399
Contractually required interest payments not expected to be collected due to estimated prepayments	—			(264,030		)
Nonaccretable difference	(30,042		)	—
Cash flows expected to be collected	187,373			3,432,369
Accretable difference	(3,252		)	(77,186		)
Fair value of acquired loans	$	184,121		$	3,355,183

The Company recorded $27.2 million and $28.3 million in pre-tax merger related expenses for the three and nine months ended September 30, 2014, respectively, including professional and legal fees of $6.4 million and $6.9 million, respectively, to directly consummate the merger. The remainder of expenses primarily relate to retention and severance compensation costs and service contract termination costs. The data processing systems converted in September 2014.

The following table provides the unaudited pro forma information for the results of operations for the three and nine months ended September 30, 2014 and 2013, as if the acquisition had occurred January 1, 2013. The pro forma results combine the historical results of Taylor Capital into the Company's consolidated statement of income including the impact of certain purchase accounting adjustments including loan discount accretion, investment securities discount accretion, intangible assets amortization, deposit premium accretion and borrowing discount amortization. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1 of each year. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, expense efficiencies or asset dispositions. The merger related expenses that have been recognized are included in net income in the table below.



	Pro Forma
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
(in thousands)
Total revenues (net interest income plus non-interest income)	$	193,507	$	193,363	$	571,289	$	590,254
Net income	7,689		43,279		75,697		135,771

The pro forma information above excludes the impact of any provision recorded related to renewing Taylor Capital loans. Revenues and earnings of the acquired company since the acquisition date have not been disclosed as Taylor Capital was merged into the Company and separate financial information is not readily available.


Note 5.	Investment Securities

Amortized cost and fair value of investment securities were as follows as of the dates indicated (in thousands):



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2014
Available for Sale
U.S. Government sponsored agencies and enterprises	$	64,809	$	1,299	$	(279	)	$	65,829
States and political subdivisions	391,900		17,330		(197		)	409,033
Residential mortgage-backed securities	795,554		8,528		(2,142		)	801,940
Commercial mortgage-backed securities	204,076		1,457		(1,371		)	204,162
Corporate bonds	265,720		3,204		(1,685		)	267,239
Equity securities	10,470		—		(23		)	10,447
Total Available for Sale	1,732,529		31,818		(5,697		)	1,758,650
Held to Maturity
States and political subdivisions	760,674		27,774		(351		)	788,097
Residential mortgage-backed securities	244,675		12,745		—			257,420
Total Held to Maturity	1,005,349		40,519		(351		)	1,045,517
Total	$	2,737,878	$	72,337	$	(6,048	)	$	2,804,167
December 31, 2013
Available for Sale
U.S. Government sponsored agencies and enterprises	$	50,486	$	1,704	$	(122	)	$	52,068
States and political subdivisions	19,398		22		(277		)	19,143
Residential mortgage-backed securities	696,415		8,555		(3,737		)	701,233
Commercial mortgage-backed securities	50,891		2,050		—			52,941
Corporate bonds	284,083		1,597		(2,610		)	283,070
Equity securities	10,649		—		(192		)	10,457
Total Available for Sale	1,111,922		13,928		(6,938		)	1,118,912
Held to Maturity
States and political subdivisions	932,955		7,584		(4,366		)	936,173
Residential mortgage-backed securities	249,578		13,178		—			262,756
Total Held to Maturity	1,182,533		20,762		(4,366		)	1,198,929
Total	$	2,294,455	$	34,690	$	(11,304	)	$	2,317,841

The Company has no direct exposure to the State of Illinois, but approximately 27% of the state and political subdivisions portfolio consisted of securities issued by municipalities located in Illinois as of September 30, 2014. Approximately 92% of such securities were general obligation issues as of September 30, 2014.

During the third quarter of 2014, the Company repositioned its balance sheet subsequent to the Taylor Capital merger and sold certain longer-term and lower-coupon investment securities with an approximate carrying amount of $451.6 million. These investment security sales shortened the overall duration of the investment securities portfolio to pre-merger levels. Also as a part of the balance sheet repositioning, securities of states and political subdivisions with an approximate fair value of $291.2 million were transferred from held to maturity to available for sale during the third quarter of 2014. As a result of the repositioning, the Company recognized a net loss of $3.2 million for the three months ended September 30, 2014.

Unrealized losses on investment securities by length of time in a continuous unrealized loss position and the fair value of the related securities at September 30, 2014 were as follows (in thousands):



	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Available for Sale
U.S. Government sponsored agencies and enterprises	$	14,631	$	(279	)	$	—	$	—		$	14,631	$	(279	)
States and political subdivisions	45,023		(128		)	3,556		(69		)	48,579		(197		)
Residential mortgage-backed securities	325,538		(1,815		)	24,935		(327		)	350,473		(2,142		)
Commercial mortgage-backed securities	154,928		(1,371		)	—		—			154,928		(1,371		)
Corporate bonds	36,654		(207		)	9,875		(1,478		)	46,529		(1,685		)
Equity securities	10,447		(23		)	—		—			10,447		(23		)
Total Available for Sale	587,221		(3,823		)	38,366		(1,874		)	625,587		(5,697		)
Held to Maturity
States and political subdivisions	22,618		(29		)	14,756		(322		)	37,374		(351		)
Total	$	609,839	$	(3,852	)	$	53,122	$	(2,196	)	$	662,961	$	(6,048	)

Unrealized losses on investment securities by length of time in a continuous unrealized loss position and the fair value of the related securities at December 31, 2013 were as follows (in thousands):



	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Available for Sale
U.S. Government sponsored agencies and enterprises	$	18,598	$	(122	)	$	—	$	—		$	18,598	$	(122	)
States and political subdivisions	2,275		(166		)	4,748		(111		)	7,023		(277		)
Residential mortgage-backed securities	232,807		(2,905		)	44,182		(832		)	276,989		(3,737		)
Corporate bonds	122,344		(2,606		)	705		(4		)	123,049		(2,610		)
Equity securities	10,457		(192		)	—		—			10,457		(192		)
Total Available for Sale	386,481		(5,991		)	49,635		(947		)	436,116		(6,938		)
Held to Maturity
States and political subdivisions	235,016		(4,330		)	1,301		(36		)	236,317		(4,366		)
Total	$	621,497	$	(10,321	)	$	50,936	$	(983	)	$	672,433	$	(11,304	)

The total number of security positions in the investment portfolio in an unrealized loss position at September 30, 2014 was 236 compared to 345 at December 31, 2013. Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) whether or not the Company is more likely than not to sell the security before recovery of its cost basis.

As of September 30, 2014, management does not have the intent to sell any of the securities in the table above and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of September 30, 2014, management believes the impairments detailed in the table above are temporary.

Changes in market interest rates can significantly influence the fair value of securities, and the fair value of our municipal securities portfolio would decline substantially if interest rates increase materially.

Net (losses) gains recognized on investment securities available for sale were as follows (in thousands):



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2014			2013		2014			2013
Realized gains	$	921		$	1	$	1,246		$	15
Realized losses	(4,167		)	—		(4,170		)	(1		)
Impairment charges	—			—		(92		)	—
Net (losses) gains	$	(3,246	)	$	1	$	(3,016	)	$	14

The amortized cost and fair value of investment securities as of September 30, 2014 by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, mortgage-backed securities are not included in the maturity categories in the following maturity summary.



	Amortized		Fair
(In thousands)	Cost		Value
Available for sale:
Due in one year or less	$	5,586	$	5,622
Due after one year through five years	319,903		322,775
Due after five years through ten years	38,026		38,347
Due after ten years	358,914		375,357
Equity securities	10,470		10,447
Residential and commercial mortgage-backed securities	999,630		1,006,102
	1,732,529		1,758,650
Held to maturity:
Due in one year or less	25,437		25,476
Due after one year through five years	252,723		255,282
Due after five years through ten years	106,997		110,693
Due after ten years	375,517		396,646
Residential mortgage-backed securities	244,675		257,420
	1,005,349		1,045,517
Total	$	2,737,878	$	2,804,167

Investment securities with carrying amounts of $1.6 billion and $1.2 billion at September 30, 2014 and December 31, 2013, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law, while only $1.1 billion and $908.4 million were required to be pledged at September 30, 2014 and December 31, 2013, respectively. Of those pledged, the Company had investment securities pledged as collateral for advances from the Federal Home Loan Bank of $257.1 million and $29.0 million at September 30, 2014 and December 31, 2013, respectively.


Note 6.	Loans

Loans consist of the following at (in thousands):



	September 30, 2014		December 31, 2013
Commercial loans	$	3,078,590	$	1,281,377
Commercial loans collateralized by assignment of lease payments	1,631,660		1,494,188
Commercial real estate	2,646,895		1,647,700
Residential real estate	516,873		314,440
Construction real estate	230,999		141,253
Indirect vehicle	273,038		262,632
Home equity	262,977		268,289
Other consumer loans	69,028		66,952
Gross loans, excluding purchased credit-impaired and covered loans	8,710,060		5,476,831
Purchased credit-impaired including covered loans	272,957		235,720
Total loans	$	8,983,017	$	5,712,551

Loans are made to individuals as well as commercial and tax exempt entities. Specific loan terms vary as to interest rate, repayment, and collateral requirements based on the type of loan requested and the credit worthiness of the prospective borrower. Except for commercial loans collateralized by assignment of lease payments, credit risk tends to be geographically concentrated in that a majority of the loan customers are located in the markets serviced by MB Financial Bank.

The Company's extension of credit is governed by its Credit Risk Policy which was established to control the quality of the Company's loans. This policy is reviewed and approved by the Company's Board of Directors on a regular basis.

Commercial Loans. Commercial credit is extended primarily to middle market customers. Such credits are typically comprised of working capital loans, loans for physical asset expansion, asset acquisition loans and other business loans. Loans to closely held businesses will generally be guaranteed in full or for a significant amount by the businesses' principal owners. Commercial loans are made based primarily on the historical and projected cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not behave as forecasted and collateral securing loans may fluctuate in value due to economic or individual performance factors. Minimum standards and underwriting guidelines have been established for all commercial loan types. Asset-based loans, also included in commercial loans, are made to businesses with the primary source of repayment derived from payments on the related assets securing the loan. Collateral for these loans may include accounts receivable, inventory and equipment, and is monitored regularly to ensure ongoing sufficiency of collateral coverage and quality. The primary risk for these loans is a significant decline in collateral values due to general market conditions. Loan terms that mitigate these risks include typical industry amortization schedules, percentage of collateral coverage, maintenance of cash collateral accounts and regular asset monitoring. Because of the national scope of our asset-based lending, the risk of these loans is also diversified by geography.

Commercial Loans Collateralized by Assignment of Lease Payments ("Lease Loans"). The Company makes lease loans to both investment grade and non-investment grade companies. Investment grade lessees are companies rated in one of the four highest categories by Moody's Investor Services or Standard & Poor's Rating Services or, in the event the related lessee has not received any such rating, where the related lessee would be viewed under the underwriting polices of the Company as an investment grade company. Whether or not companies fall into this category, each lease loan is considered on its individual merit based on financial information available at the time of underwriting.

Commercial Real Estate Loans. Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and the repayment of these loans is largely dependent on the successful operation of the property. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type.

Construction Real Estate Loans. The Company defines construction loans as loans where the loan proceeds are controlled by the Company and used exclusively for the improvement of real estate in which the Company holds a mortgage. Due to the inherent risk in this type of loan, they are subject to other industry specific policy guidelines outlined in the Company's Credit Risk Policy.

Consumer Related Loans. The Company originates direct and indirect consumer loans, including primarily residential real estate, home equity lines and loans, credit cards, and indirect vehicle loans (motorcycle, powersports, recreational and marine vehicles), using a matrix-based credit analysis as part of the underwriting process. Each loan type has a separate matrix which consists of several factors including debt to income, type of collateral and loan to collateral value, credit history and Company relationship with the borrower. Indirect loan and credit card underwriting involves the use of risk-based pricing in the underwriting process.

A collateral pledge agreement exists whereby at all times, the Company must keep on hand, free of all other pledges, liens, and encumbrances, first mortgage loans and home equity loans with unpaid principal balances aggregating no less than 133% for first mortgage loans and 250% for home equity loans of the outstanding advances from the Federal Home Loan Bank. As of September 30, 2014 and December 31, 2013, the Company had $1.7 billion and $835.1 million, respectively, of loans pledged as collateral for long-term Federal Home Loan Bank advances and third party letters of credit, while only $760.5 million and $518.4 million were required to be pledged at September 30, 2014 and December 31, 2013, respectively.

The following table presents the contractual aging of the recorded investment in past due loans by class of loans as of September 30, 2014 and December 31, 2013 (in thousands):



	Current		30-59 Days Past Due		60-89 Days Past Due		Loans Past Due 90 Days or More		Total Past Due		Total
September 30, 2014
Commercial	$	3,071,130	$	5,804	$	653	$	1,003	$	7,460	$	3,078,590
Commercial collateralized by assignment of lease payments	1,621,904		2,102		5,506		2,148		9,756		1,631,660
Commercial real estate
Healthcare	347,189		—		—		—		—		347,189
Industrial	345,865		123		—		8,018		8,141		354,006
Multifamily	416,171		386		298		1,192		1,876		418,047
Retail	432,324		2,762		—		3,484		6,246		438,570
Office	274,508		383		—		2,717		3,100		277,608
Other	806,688		971		324		3,492		4,787		811,475
Residential real estate	502,516		4,119		2,648		7,590		14,357		516,873
Construction real estate	230,662		—		—		337		337		230,999
Indirect vehicle	270,179		1,673		879		307		2,859		273,038
Home equity	251,397		2,158		1,335		8,087		11,580		262,977
Other consumer	69,009		14		2		3		19		69,028
Gross loans, excluding purchased credit-impaired and covered loans	8,639,542		20,495		11,645		38,378		70,518		8,710,060
Purchased credit-impaired including covered loans	166,364		3,909		2,464		100,220		106,593		272,957
Total loans	$	8,805,906	$	24,404	$	14,109	$	138,598	$	177,111	$	8,983,017
Non-performing loan aging	$	55,649	$	5,716	$	1,354	$	37,542	$	44,612	$	100,261
December 31, 2013
Commercial	$	1,273,302	$	5,952	$	626	$	1,497	$	8,075	$	1,281,377
Commercial collateralized by assignment of lease payments	1,489,391		3,841		656		300		4,797		1,494,188
Commercial real estate
Healthcare	213,665		—		—		3,064		3,064		216,729
Industrial	372,975		5,465		—		1,404		6,869		379,844
Multifamily	302,456		3,078		181		2,226		5,485		307,941
Retail	334,198		328		2,816		7,258		10,402		344,600
Office	155,936		—		—		2,066		2,066		158,002
Other	233,464		4,898		259		1,963		7,120		240,584
Residential real estate	302,362		1,422		1,030		9,626		12,078		314,440
Construction real estate	138,563		391		—		2,299		2,690		141,253
Indirect vehicle	259,488		2,210		657		277		3,144		262,632
Home equity	257,219		1,725		2,165		7,180		11,070		268,289
Other consumer	66,866		81		1		4		86		66,952
Gross loans, excluding covered loans	5,399,885		29,391		8,391		39,164		76,946		5,476,831
Covered loans	135,717		902		3,346		95,755		100,003		235,720
Total loans	$	5,535,602	$	30,293	$	11,737	$	134,919	$	176,949	$	5,712,551
Non-performing loan aging	$	56,339	$	14,325	$	3,283	$	32,614	$	50,222	$	106,561

The following table presents the recorded investment in non-accrual loans and loans past due ninety days or more and still accruing by class of loans, excluding purchased credit-impaired and covered loans, as of September 30, 2014 and December 31, 2013 (in thousands):



	September 30, 2014				December 31, 2013
			Loans past due				Loans past due
	Non-accrual		90 days or more and still accruing		Non-accrual		90 days or more and still accruing
Commercial	$	18,711	$	134	$	17,781	$	—
Commercial collateralized by assignment of lease payments	2,402		1,738		4,276		291
Commercial real estate:
Healthcare	—		—		3,064		—
Industrial	11,029		240		15,265		155
Multifamily	6,968		—		5,145		—
Office	5,433		—		11,703		—
Retail	3,493		—		2,969		—
Other	15,100		569		19,991		—
Residential real estate	16,815		—		13,009		—
Construction real estate	337		—		475		—
Indirect vehicle	1,652		—		1,459		—
Home equity	15,635		—		10,969		—
Other consumer	5		—		9		—
Total	$	97,580	$	2,681	$	106,115	$	446

The increase in non-performing residential real estate loans relates to a group of restructured loans that are less than 90 days past due that are now reported as non-performing.

The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company's risk rating system, the Company classifies potential problem and problem loans as “Special Mention,” “Substandard,” and “Doubtful.” Substandard loans include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses that deserve management's close attention are deemed to be Special Mention. Risk ratings are updated at least annually and any time the situation warrants.

Loans listed as not rated are included in groups of homogeneous loans with similar risk and loss characteristics. The following tables present the risk category of loans by class of loans based on the most recent analysis performed, excluding purchased credit-impaired and covered loans, as of September 30, 2014 and December 31, 2013 (in thousands):



	Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2014
Commercial	$	2,887,706	$	148,275	$	42,609	$	—	$	3,078,590
Commercial collateralized by assignment of lease payments	1,626,794		51		4,815		—		1,631,660
Commercial real estate
Healthcare	347,189		—		—		—		347,189
Industrial	326,390		6,970		20,646		—		354,006
Multifamily	409,901		390		7,756		—		418,047
Retail	423,436		1,608		13,526		—		438,570
Office	266,644		2,573		8,391		—		277,608
Other	784,978		9,411		17,086		—		811,475
Construction real estate	224,884		5,778		337		—		230,999
Total	$	7,297,922	$	175,056	$	115,166	$	—	$	7,588,144
December 31, 2013
Commercial	$	1,193,114	$	26,637	$	61,000	$	626	$	1,281,377
Commercial collateralized by assignment of lease payments	1,486,899		553		6,736		—		1,494,188
Commercial real estate
Healthcare	189,705		21,186		2,774		3,064		216,729
Industrial	345,236		5,328		29,280		—		379,844
Multifamily	296,179		342		11,420		—		307,941
Retail	316,420		10,660		17,520		—		344,600
Office	151,393		2,682		3,927		—		158,002
Other	217,188		349		23,047		—		240,584
Construction real estate	139,847		540		866		—		141,253
Total	$	4,335,981	$	68,277	$	156,570	$	3,690	$	4,564,518

Approximately $63.5 million and $80.7 million of the substandard and doubtful loans were non-performing as of September 30, 2014 and December 31, 2013, respectively.

For residential real estate, home equity, indirect vehicle and other consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in those loan classes based on payment activity, excluding purchased credit-impaired and covered loans, as of September 30, 2014 and December 31, 2013 (in thousands):



	Performing		Non-performing		Total
September 30, 2014
Residential real estate	$	500,058	$	16,815	$	516,873
Indirect vehicle	271,386		1,652		273,038
Home equity	247,342		15,635		262,977
Other consumer	69,023		5		69,028
Total	$	1,087,809	$	34,107	$	1,121,916
December 31, 2013
Residential real estate	$	301,431	$	13,009	$	314,440
Indirect vehicle	261,173		1,459		262,632
Home equity	257,320		10,969		268,289
Other consumer	66,943		9		66,952
Total	$	886,867	$	25,446	$	912,313

The following tables present loans individually evaluated for impairment by class of loans, excluding purchased credit-impaired and covered loans, as of September 30, 2014 and December 31, 2013 (in thousands):



	September 30, 2014
									Three Months Ended				Nine Months Ended
	Unpaid Principal Balance		Recorded Investment		Partial Charge-offs		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	14,719	$	14,130	$	589	$	—	$	14,936	$	—	$	10,542	$	—
Commercial collateralized by assignment of lease payments	1,857		1,857		—		—		2,026		31		2,542		81
Commercial real estate:
Healthcare	—		—		—		—		—		—		—		—
Industrial	11,505		8,388		3,117		—		8,844		—		8,407		—
Multifamily	2,409		2,409		—		—		2,492		7		1,963		45
Retail	3,950		2,730		1,220		—		2,193		—		4,353		—
Office	2,339		1,546		793		—		1,580		—		1,507		—
Other	14,190		14,149		41		—		14,978		—		6,506		—
Residential real estate	1,941		1,941		—		—		1,899		—		3,023		—
Construction real estate	—		—		—		—		—		—		45		—
Indirect vehicle	—		—		—		—		—		—		—		—
Home equity	577		577		—		—		577		—		824		—
Other consumer	—		—		—		—		—		—		—		—
With an allowance recorded:
Commercial	4,720		4,720		—		2,250		5,353		—		16,266		—
Commercial collateralized by assignment of lease payments	4,354		4,354		—		238		3,725		58		1,772		82
Commercial real estate:
Healthcare	—		—		—		—		—		—		—		—
Industrial	3,047		3,042		5		333		3,140		—		6,482		—
Multifamily	6,644		5,673		971		1,311		6,335		18		6,467		123
Retail	10,181		7,797		2,384		690		8,637		—		8,232		—
Office	2,298		1,946		352		576		2,186		—		2,532		—
Other	1,482		1,397		85		243		1,674		4		10,135		12
Residential real estate	16,361		13,870		2,491		3,196		14,646		—		14,549		—
Construction real estate	2,707		337		2,370		161		431		—		463		—
Indirect vehicle	336		212		124		27		391		—		336		—
Home equity	26,592		24,985		1,607		1,690		25,771		—		25,346		—
Other consumer	—		—		—		—		—		—		—		—
Total	$	132,209	$	116,060	$	16,149	$	10,715	$	121,814	$	118	$	132,292	$	343



	December 31, 2013
	Unpaid Principal Balance		Recorded Investment		Partial Charge-offs		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	8,903	$	8,903	$	—	$	—	$	8,259	$	—
Commercial collateralized by assignment of lease payments	3,401		3,401		—		—		1,030		6
Commercial real estate:
Healthcare	—		—		—		—		2,698		—
Industrial	7,560		7,560		—		—		8,900		—
Multifamily	1,166		1,166		—		—		758		11
Retail	4,466		4,466		—		—		3,628		—
Office	559		527		32		—		922		—
Other	2,963		2,963		—		—		4,380		—
Residential real estate	4,234		4,234		—		—		3,260		—
Construction real estate	—		—		—		—		—		—
Indirect vehicle	—		—		—		—		—		—
Home equity	577		577		—		—		797		—
Other consumer	—		—		—		—		—		—
With an allowance recorded:
Commercial	8,923		8,919		4		4,284		13,476		4
Commercial collateralized by assignment of lease payments	1,060		1,060		—		144		1,279		192
Commercial real estate:
Healthcare	3,186		3,064		122		382		8,189		—
Industrial	7,707		7,705		2		3,038		3,699		—
Multifamily	5,374		5,374		—		1,661		6,443		340
Retail	14,169		12,428		1,741		1,511		12,885		280
Office	2,442		2,442		—		791		4,045		—
Other	20,367		17,029		3,338		796		12,868		20
Residential real estate	13,496		12,710		786		3,119		12,966		245
Construction real estate	475		475		—		227		1,603		—
Indirect vehicle	173		123		50		57		86		—
Home equity	23,840		23,395		445		1,358		24,283		772
Other consumer	—		—		—		—		—		—
Total	$	135,041	$	128,521	$	6,520	$	17,368	$	136,454	$	1,870

Impaired loans included accruing restructured loans of $16.9 million and $29.4 million that have been modified and are performing in accordance with those modified terms as of September 30, 2014 and December 31, 2013, respectively. In addition, impaired loans included $22.4 million and $25.0 million of non-performing, restructured loans as of September 30, 2014 and December 31, 2013, respectively.

Loans may be restructured in an effort to maximize collections from financially distressed borrowers. We use various restructuring techniques, including, but not limited to, deferring past due interest or principal, implementing an A/B note structure, redeeming past due taxes, reducing interest rates, extending maturities and modifying amortization schedules. Residential real estate loans are restructured in an effort to minimize losses while allowing borrowers to remain in their primary residences when possible. Programs that we offer to residential real estate borrowers include the Home Affordable Refinance Program (“HARP”), a restructuring program similar to the Home Affordable Modification Program (“HAMP”) for first mortgage borrowers, the Second Lien Modification Program (“2MP”) and similar programs for home equity borrowers in keeping with the restructuring techniques discussed above.

Periodically, the Company will restructure a note into two separate notes (A/B structure), charging off the entire B portion of the note. The A note is structured with appropriate loan-to-value and cash flow coverage ratios that provide for a high likelihood of

repayment. The A note is classified as a non-performing note until the borrower has displayed a historical payment performance for a reasonable time prior to and subsequent to the restructuring. A period of sustained repayment for at least six months generally is required to return the note to accrual status provided that management has determined that the performance is reasonably expected to continue. The A note will be classified as a restructured note (either performing or non-performing) through the calendar year of the restructuring that the historical payment performance has been established. As of September 30, 2014 and December 31, 2013, there was approximately $1.1 million in recorded investment in relation to one A/B structure.

A loan classified as a troubled debt restructuring will no longer be included in the troubled debt restructuring disclosures in the years after the restructuring if the loan performs in accordance with the terms specified by the restructuring agreement and the interest rate specified in the restructuring agreement represents a market rate at the time of modification. The specified interest rate is considered a market rate when the interest rate is equal to or greater than the rate the Company is willing to accept at the time of restructuring for a new loan with comparable risk. If there are concerns that the borrower will not be able to meet the modified terms of the loan, the loan will continue to be included in the troubled debt restructuring disclosures.

Impairment analyses on commercial-related loans classified as troubled debt restructurings are performed in conjunction with the normal allowance for loan loss process. Consumer loans classified as troubled debt restructurings are aggregated in two pools that share common risk characteristics, home equity and residential real estate loans, with impairment measured on a quarterly basis based on the present value of expected future cash flows discounted at the loan's effective interest rate.

The following table presents loans that have been restructured during the three months ended September 30, 2014 (dollars in thousands):



	September 30, 2014
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Charge-offs and Specific Reserves
Non-Performing:
Residential real estate	2	$	411	$	411	$	246
Indirect vehicle	15	95		95		38
Home equity	6	604		604		104
Total	23	$	1,110	$	1,110	$	388

The following table presents loans that have been restructured during the nine months ended September 30, 2014 (dollars in thousands):



	September 30, 2014
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Charge-offs and Specific Reserves
Performing:
Indirect vehicle	1	$	5	$	5	$	—
Home equity	6	1,883		1,883		—
Total	7	$	1,888	$	1,888	$	—
Non-Performing:
Commercial	1	$	263	$	263	$	85
Commercial real estate:
Multifamily	1	158		158		40
Residential real estate	6	1,850		1,850		246
Indirect vehicle	44	262		262		65
Home equity	13	1,667		1,667		104
Total	65	$	4,200	$	4,200	$	540

The following table presents loans that have been restructured during the three months ended September 30, 2013 (dollars in thousands):



	September 30, 2013
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Charge-offs and Specific Reserves
Performing:
Residential real estate	1	$	95	$	95	$	—
Home equity	1	19		19		—
Total	2	$	114	$	114	$	—
Non-Performing:
Commercial real estate:
Healthcare	1	$	3,164	$	3,164	$	496
Multifamily	1	436		436		119
Retail	1	205		205		56
Residential real estate	1	394		394		—
Indirect vehicle	17	113		89		24
Home equity	5	397		397		—
Total	26	$	4,709	$	4,685	$	695

The following table presents loans that have been restructured during the nine months ended September 30, 2013 (dollars in thousands):



	September 30, 2013
	Number of Loans	Pre-Modification Recorded Investment		Post-Modification Recorded Investment		Charge-offs and Specific Reserves
Performing:
Multifamily	1	$	601	$	601	$	—
Residential real estate	5	854		854		—
Home equity	7	723		723		—
Total	13	$	2,178	$	2,178	$	—
Non-Performing:
Commercial	2	$	1,251	$	1,251	$	673
Commercial real estate:
Healthcare	1	3,164		3,164		496
Industrial	4	2,570		2,570		1,425
Multifamily	2	623		623		169
Retail	3	862		862		235
Other	1	84		84		23
Residential real estate	6	1,149		1,149		—
Indirect vehicle	20	127		103		24
Home equity	25	3,333		3,333		—
Total	64	$	13,163	$	13,139	$	3,045

Of the troubled debt restructurings entered into during the past twelve months, none subsequently defaulted during the nine months ended September 30, 2014. Performing troubled debt restructurings are considered to have defaulted when they become 90 days or more past due post restructuring or are placed on non-accrual status.

The following tables present the troubled debt restructurings activity during the nine months ended September 30, 2014 (in thousands):



	Performing			Non-performing
Beginning balance	$	29,430		$	24,952
Additions	1,888			4,200
Charge-offs	(368		)	(2,147		)
Principal payments, net	(2,436		)	(3,829		)
Removals	(8,573		)	(3,572		)
Transfer to other real estate owned	—			(221		)
Transfer from/to performing	6,292			9,356
Transfer from/to non-performing	(9,356		)	(6,292		)
Ending balance	$	16,877		$	22,447

Approximately $6.3 million of non-performing troubled debt restructurings were transferred to performing status. A majority of these loans were identified as non-performing troubled debt restructurings during the first half of 2013 and have performed in accordance with the modified terms. The loans continue to be reported as performing troubled debt restructurings. The loans transferred to non-performing in the table above were restructured in 2011 and 2012. Loans removed from troubled debt restructuring status are those that were restructured in a previous calendar year at a market rate of interest and have performed in compliance with the modified terms.

The following table presents the type of modification for loans that have been restructured during the nine months ended September 30, 2014 (in thousands):



	September 30, 2014

	Extended		Extended
	Maturity,		Maturity and		Delay in
	Amortization		Delay in Payments		Payments or
	and Reduction		or Reduction of		Reduction of
	of Interest Rate		Interest Rate		Interest Rate		Total
Commercial	$	—	$	263	$	—	$	263
Commercial real estate:
Multifamily	—		158		—		158
Residential real estate	411		1,269		170		1,850
Indirect vehicle	—		—		267		267
Home equity	1,793		1,210		547		3,550
Total	$	2,204	$	2,900	$	984	$	6,088

The following table presents the activity in the allowance for credit losses, balance in allowance for credit losses and recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2014 and 2013 (in thousands):



	Commercial		Commercial collateralized by assignment of lease payments			Commercial real estate			Residential real estate			Construction real estate			Indirect vehicle		Home equity		Other consumer			Unfunded commitments			Total
September 30, 2014
Allowance for credit losses:
Three Months Ended
Beginning balance	$	23,154	$	9,425		$	43,933		$	7,495		$	4,613		$	1,727	$	8,281	$	2,282		$	2,995		$	103,905
Allowance for unfunded credit commitments acquired through business combination	—		—			—			—			—			—		—		—			1,261			1,261
Utilization of allowance for unfunded credit commitments	—		—			—			—			—			—		—		—			(637		)	(637		)
Charge-offs	606		—			1,027			740			5			1,043		566		497			—			4,484
Recoveries	564		425			2,227			4			25			402		46		65			—			3,758
Provision	2,181		(484		)	(4,193		)	534			2,174			643		1,836		(65		)	483			3,109
Ending balance	$	25,293	$	9,366		$	40,940		$	7,293		$	6,807		$	1,729	$	9,597	$	1,785		$	4,102		$	106,912

Nine Months Ended
Beginning balance	$	23,461	$	9,159		$	51,628		$	8,872		$	6,856		$	1,662	$	8,478	$	1,630		$	1,716		$	113,462
Allowance for unfunded credit commitments acquired through business combination	—		—			—			—			—			—		—		—			1,261			1,261
Utilization of allowance for unfunded credit commitments	—		—			—			—			—			—		—		—			(637		)	(637		)
Charge-offs	1,142		40			9,910			1,438			75			2,546		2,002		1,582			—			18,735
Recoveries	2,888		555			3,279			529			201			1,283		306		211			—			9,252
Provision	86		(308		)	(4,057		)	(670		)	(175		)	1,330		2,815		1,526			1,762			2,309
Ending balance	$	25,293	$	9,366		$	40,940		$	7,293		$	6,807		$	1,729	$	9,597	$	1,785		$	4,102		$	106,912
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	2,250	$	238		$	3,153		$	3,196		$	161		$	27	$	1,690	$	—		$	1,316		$	12,031
Collectively evaluated for impairment	22,433		9,128			37,156			4,097			6,641			1,702		7,907		1,785			2,786			93,635
Acquired and accounted for under ASC 310-30 (1)	610		—			631			—			5			—		—		—			—			1,246
Total ending allowance balance	$	25,293	$	9,366		$	40,940		$	7,293		$	6,807		$	1,729	$	9,597	$	1,785		$	4,102		$	106,912
Loans:
Individually evaluated for impairment	$	18,850	$	6,211		$	49,077		$	15,811		$	337		$	212	$	25,562	$	—		$	—		$	116,060
Collectively evaluated for impairment	3,059,740		1,625,449			2,597,818			501,062			230,662			272,826		237,415		69,028			—			8,594,000
Acquired and accounted for under ASC 310-30 (1)	112,066		—			110,357			3,362			24,274			—		115		22,783			—			272,957
Total ending loans balance	$	3,190,656	$	1,631,660		$	2,757,252		$	520,235		$	255,273		$	273,038	$	263,092	$	91,811		$	—		$	8,983,017



	Commercial			Commercial collateralized by assignment of lease payments		Commercial real estate			Residential real estate		Construction real estate			Indirect vehicle		Home equity			Other consumer		Unfunded commitments			Total
September 30, 2013
Allowance for credit losses:
Three Months Ended
Beginning balance	$	27,277		$	8,529	$	60,014		$	8,121	$	8,695		$	1,537	$	8,206		$	1,306	$	1,812		$	125,497
Transfer to (from) allowance for unfunded credit commitments	—			—		—			—		—			—		—			—		—			—
Charge-offs	1,686			—		1,236			713		26			572		437			485		—			5,155
Recoveries	579			—		966			48		420			372		228			74		—			2,687
Provision	(45		)	721		(3,983		)	347		(735		)	293		(152		)	368		(118		)	(3,304		)
Ending balance	$	26,125		$	9,250	$	55,761		$	7,803	$	8,354		$	1,630	$	7,845		$	1,263	$	1,694		$	119,725

Nine Months Ended
Beginning balance	$	24,943		$	7,755	$	61,056		$	6,941	$	11,222		$	1,324	$	9,401		$	1,562	$	4,075		$	128,279
Transfer to (from) allowance for unfunded credit commitments	—			—		—			—		500			—		—			—		(500		)	—
Charge-offs	3,030			—		5,131			2,074		855			1,930		2,547			1,501		—			17,068
Recoveries	1,808			1,131		5,353			461		827			1,111		442			185		—			11,318
Provision	2,404			364		(5,517		)	2,475		(3,340		)	1,125		549			1,017		(1,881		)	(2,804		)
Ending balance	$	26,125		$	9,250	$	55,761		$	7,803	$	8,354		$	1,630	$	7,845		$	1,263	$	1,694		$	119,725
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	4,389		$	285	$	7,464		$	3,033	$	240		$	—	$	781		$	—	$	657		$	16,849
Collectively evaluated for impairment	20,871			8,965		46,412			4,663		8,114			1,630		7,064			1,263		1,037			100,019
Acquired and accounted for under ASC 310-30 (1)	865			—		1,885			107		—			—		—			—		—			2,857
Total ending allowance balance	$	26,125		$	9,250	$	55,761		$	7,803	$	8,354		$	1,630	$	7,845		$	1,263	$	1,694		$	119,725

Loans:
Individually evaluated for impairment	$	19,836		$	2,330	$	60,600		$	15,851	$	1,622		$	106	$	23,278		$	—	$	—		$	123,623
Collectively evaluated for impairment	1,134,376			1,466,484		1,577,768			291,699		134,524			257,634		251,206			57,418		—			5,171,109
Acquired and accounted for under ASC 310-30 (1)	35,649			—		159,799			5,982		61,446			—		110			29,014		—			292,000
Total ending loans balance	$	1,189,861		$	1,468,814	$	1,798,167		$	313,532	$	197,592		$	257,740	$	274,594		$	86,432	$	—		$	5,586,732

(1) Loans acquired in business combinations and accounted for under ASC Subtopic 310-30 “Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality.”


•	Pass rated loans (typically performing loans) are accounted for in accordance with ASC 310-20 "Nonrefundable Fees and Other Costs" as these loans do not have evidence of credit deterioration since origination.


•	Non-impaired loans (typically performing substandard loans) are accounted for in accordance with ASC 310-30 if they display at least some level of credit deterioration since origination.


•	Impaired loans (typically substandard loans on non-accrual status) are accounted for in accordance with ASC 310-30 as they display significant credit deterioration since origination.

For pass rated loans (non-purchased credit-impaired loans), the difference between the estimated fair value of the loans (computed on a loan by loan basis) and the principal outstanding is accreted over the remaining life of the loans. We anticipate recording a provision for the acquired portfolio in future quarters related to renewing Taylor loans which will largely offset the accretion from the pass rated loans.

accretable difference. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

Substantially all of the loans acquired in transactions with the FDIC displayed at least some level of credit deterioration and as such are included as non-impaired and impaired loans as described immediately above.

During the nine months ended September 30, 2014 there was a negative provision for credit losses of $904 thousand and net charge-offs of $83 thousand, in relation to 16 pools of purchased loans with a total carrying amount of $94.8 million as of September 30, 2014. There was $1.2 million and $2.2 million in allowance for loan losses related to these purchased loans at September 30, 2014 and December 31, 2013, respectively. The provision for credit losses and accompanying charge-offs are included in the table above.

Changes in the accretable yield for loans acquired and accounted for under ASC 310-30 were as follows for the three and nine months ended September 30, 2014 and 2013 (in thousands):



	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2014		2013			2014		2013
Balance at beginning of period	$	1,218	$	6,360		$	2,337	$	5,685
Purchases	3,252		—			3,252		—
Accretion	2,372		(2,427		)	679		(2,859		)
Other	931		—			1,505		1,107
Balance at end of period	$	7,773	$	3,933		$	7,773	$	3,933

An interest recovery was recognized in the third quarter of 2014 on a covered loan.

In our FDIC-assisted transactions, the fair value of purchased impaired loans, on the acquisition date, was determined based on assigned risk ratings, expected cash flows and the fair value of loan collateral. The fair value of loans that were non-impaired was determined based on estimates of losses on defaults and other market factors. Due to the loss-share agreements with the FDIC, we recorded a receivable (FDIC indemnification asset) from the FDIC equal to the present value of the corresponding reimbursement percentages on the estimated losses embedded in the loan portfolio.

When cash flow estimates are adjusted downward for a particular loan pool, the FDIC indemnification asset is increased. An allowance for loan losses is established for the impairment of the loans. A provision for loan losses is recognized for the difference between the increase in the FDIC indemnification asset and the decrease in cash flows.

When cash flow estimates are adjusted upward for a particular loan pool, the FDIC indemnification asset is decreased. The difference between the decrease in the FDIC indemnification asset and the increase in cash flows is accreted over the estimated life of the loan pool.

When cash flow estimates are adjusted downward for covered foreclosed real estate, the FDIC indemnification asset is increased. A charge is recognized for the difference between the increase in the FDIC indemnification asset and the decrease in cash flows.

When cash flow estimates are adjusted upward for covered foreclosed real estate, the FDIC indemnification asset is decreased. Any write-down after the transfer to covered foreclosed real estate is reversed.

In both scenarios, the clawback liability (the amount the FDIC requires us to pay back if certain thresholds are met) will increase or decrease accordingly.

For other loans acquired through a business combinations, the fair value of purchased impaired loans, on the acquisition date, was determined based on assigned risk ratings, expected cash flows and the fair value of loan collateral. The fair value of loans that were non-impaired was determined based on estimates of losses on defaults and other market factors.

The carrying amount of loans acquired through a business combination by loan type are as follows (in thousands):



September 30, 2014	Purchased Impaired Loans			Purchased Non-Impaired Loans		Total
Covered loans:
Commercial related (1)	$	1,410		$	2,255	$	3,665
Commercial	827			1,308		2,135
Commercial real estate	32,857			23,531		56,388
Construction real estate	—			3,164		3,164
Other	1,655			22,240		23,895
Total covered loans	$	36,749		$	52,498	$	89,247
Estimated (payable) receivable amount from the FDIC under the loss-share agreement (2)	$	(2,892	)	$	4,866	$	1,974
Non-covered loans:
Commercial related (3)	$	4,856		$	12,913	$	17,769
Commercial loans	101,410			1,736,188		1,837,598
Commercial loans collateralized by assignment of lease payments	—			133,539		133,539
Commercial real estate	53,969			1,002,229		1,056,198
Construction real estate	21,110			161,115		182,225
Other	2,365			237,737		240,102
Total non-covered loans	$	183,710		$	3,283,721	$	3,467,431


(1)	Covered commercial related loans include commercial, commercial real estate and construction real estate loans acquired in connection with the Benchmark FDIC-assisted transactions.


(2)	Estimated reimbursable amounts from the FDIC under the loss-share agreement exclude $231 thousand in amounts due to the FDIC related to covered other real estate owned.


(3)	Non-covered commercial related loans include commercial, commercial real estate and construction real estate for InBank and Heritage.

Outstanding balances on purchased loans from the FDIC were $114.0 million and $268.5 million as of September 30, 2014 and December 31, 2013, respectively. The related carrying amount on loans purchased from the FDIC was $109.1 million and $256.4 million as of September 30, 2014 and December 31, 2013, respectively.

Effective April 1, 2014, the losses on commercial related loans (commercial, commercial real estate and construction real estate) acquired in connection with the Heritage FDIC-assisted transaction ceased being covered under the loss-share agreement for that transaction. The carrying amount of those loans was $3.9 million as of September 30, 2014. Any recoveries, net of expenses, received on commercial related loans on which losses were incurred prior to April 1, 2014 will continue to be covered (and any such net recoveries must be shared with the FDIC in accordance with the loss-share agreement) through March 31, 2017. The losses on consumer related loans acquired in connection with the Heritage FDIC-assisted transaction will continue to be covered under the loss-share agreement through March 31, 2019.

The losses on commercial related loans acquired in connection with the Benchmark FDIC-assisted transaction will cease to be covered under the loss-share agreement for that transaction effective January 1, 2015. Effective July 1, 2015, the losses on commercial related loans acquired in connection with Broadway and New Century FDIC-assisted transactions will cease to be covered under the loss-share agreements for those transactions. Any recoveries, net of expenses, received on commercial related loans on which losses were incurred prior to January 1, 2015 and July 1, 2015, for the respective transactions, will continue to be covered (and any such net recoveries must be shared with the FDIC in accordance with the loss-share agreements) through December 31, 2017 and June 30, 2018 for the Benchmark FDIC-assisted transaction and Broadway and New Century FDIC-assisted transactions, respectively. The losses on consumer related loans acquired in connection with the Benchmark FDIC-assisted transaction and Broadway and New Century FDIC-assisted transactions will continue to be covered under the loss-share agreements through December 31, 2019 and June 30, 2020, respectively.


Note 7.	Goodwill and Intangibles

The excess of the cost of an acquisition over the fair value of the net assets acquired, including core deposit and client relationship intangibles, consists of goodwill. Under ASC Topic 350, goodwill is subject to at least annual assessments for impairment by applying a fair value based test. The Company reviews goodwill to determine potential impairment annually, or more frequently if events and circumstances indicate that goodwill might be impaired, by comparing the carrying value of the reporting units with the fair value of the reporting units.

The Company's annual assessment date is as of December 31. Goodwill is tested for impairment at the reporting unit level. The Company has three reporting units: banking, leasing and mortgage banking. No impairment losses were recognized during the three or nine months ended September 30, 2014 or 2013. The carrying amount of goodwill was $698.9 million at September 30, 2014 and $423.4 million at December 31, 2013. The increase of $275.6 million in goodwill was due to the Taylor Capital merger.

The Company has other intangible assets consisting of core deposit and client relationship intangibles that had a remaining weighted average amortization period of approximately five years as of September 30, 2014. The Company recognized a $25.0 million core deposit intangible in the third quarter of 2014 due to the Taylor Capital merger

The following table presents the changes in the carrying amount of core deposit and client relationship intangibles, gross carrying amount, accumulated amortization, and net book value as of September 30, 2014 (in thousands):



	Nine Months Ended
	September 30, 2014
Balance at beginning of period	$	23,428
Amortization expense	(3,884		)
Other intangibles from business combination	25,000
Balance at end of period	$	44,544

Gross carrying amount	$	79,368
Accumulated amortization	(34,824		)
Net book value	$	44,544

The following presents the estimated future amortization expense of other intangible assets (in thousands):



Year ending December 31,	Amount
2014	$	2,114
2015	7,197
2016	6,162
2017	5,450
2018	4,874
Thereafter	18,747
	$	44,544


Note 8.	Deposits

The composition of deposits was as follows (in thousands):



	September 30,		December 31,
	2014		2013
Demand deposit accounts, noninterest bearing	$	3,807,554	$	2,375,863
NOW and money market accounts	4,197,166		2,682,419
Savings accounts	931,985		855,394
Certificates of deposit, $100,000 or more	1,544,267		827,413
Other certificates of deposit	757,576		640,170
Total	$	11,238,548	$	7,381,259

Certificates of deposit of $100,000 or more included $655.8 million and $224.2 million of brokered deposits at September 30, 2014 and December 31, 2013, respectively. Brokered deposits typically consist of smaller individual time certificates that have the same liquidity characteristics and yields consistent with time certificates of $100,000 or more.


Note 9.	Short-Term Borrowings

Short-term borrowings were as follows as of September 30, 2014 and December 31, 2013 (dollars in thousands):



	September 30, 2014				December 31, 2013
	Weighted Average Cost		Amount		Weighted Average Cost		Amount
Customer repurchase agreements	0.21	%	$	248,150	0.20	%	$	193,389
Federal Home Loan Bank advances	0.07		350,000		0.17		300,000
Federal funds purchased	0.45		54,010		—		—
Line of credit	2.00		15,000		—		—
	0.20	%	$	667,160	0.18	%	$	493,389

Securities sold under agreements to repurchase are agreements in which the Company acquires funds by selling assets to another party under a simultaneous agreement to repurchase the same assets at a specified price and date. The Company enters into repurchase agreements and also offers a demand deposit account product to customers that sweeps their balances in excess of an agreed upon target amount into overnight repurchase agreements. All securities sold under agreements to repurchase are recorded on the face of the balance sheet.

The Company had a Federal Home Loan Bank fixed rate advance with a maturity date less than one year of $350.0 million and $300.0 million at September 30, 2014 and December 31, 2013, respectively. The $350.0 million advance at September 30, 2014 had a rate of 0.07% and matures in December 2014. The $300.0 million advance at December 31, 2013 matured early in the first quarter of 2014. The Company has investment securities available for sale and loans pledged as collateral on this FHLB advance. See Note 5. Investment Securities and Note 6. Loans of the notes to the consolidated financial statements.

On March 9, 2012, the Company entered into a $35.0 million unsecured line of credit with a correspondent bank. Interest is payable at a rate of one month LIBOR + 1.85%. As of September 30, 2014, $15.0 million was outstanding. The line matured on September 8, 2014, was renewed and is scheduled to mature on September 7, 2015.


Note 10.	Long-term Borrowings

The Company had Federal Home Loan Bank advances with remaining contractual maturities greater than one year of $4.2 million at September 30, 2014 and $4.3 million at December 31, 2013. As of September 30, 2014, the advances had fixed terms with effective interest rates, net of discounts, ranging from 3.23% to 5.87% and maturities ranging from April 2021 to April 2035. The Company has investment securities available for sale and loans pledged as collateral on this FHLB advance. See Note 5. Investment Securities and Note 6. Loans of the notes to the consolidated financial statements.

The Company had notes payable to banks totaling $32.8 million and $17.5 million at September 30, 2014 and December 31, 2013, respectively, which as of September 30, 2014, were accruing interest at rates ranging from 2.50% to 12.00%. Lease investments includes equipment with an amortized cost of $28.3 million and $25.7 million at September 30, 2014 and December 31, 2013, respectively, that is pledged as collateral on these notes.

The Company had a $40.0 million 10-year structured repurchase agreement as of September 30, 2014 and December 31, 2013, which bears interest at a fixed rate borrowing of 4.75% and expires in 2016.


Note 11.	Junior Subordinated Notes Issued to Capital Trusts

The Company has established statutory trusts for the sole purpose of issuing trust preferred securities and related trust common securities. The proceeds from such issuances were used by the trusts to purchase junior subordinated notes of the Company, which are the sole assets of each trust. Concurrently with the issuance of the trust preferred securities, the Company issued guarantees for the benefit of the holders of the trust preferred securities. The Company’s outstanding trust preferred securities qualify, and are treated by the Company, as Tier 1 regulatory capital. The Company owns all of the common securities of each trust. The trust preferred securities issued by each trust rank equally with the common securities in right of payment, except that if an event of default under the indenture governing the notes has occurred and is continuing, the preferred securities will rank senior to the common securities in right of payment.

The table below summarizes the outstanding junior subordinated notes and the related trust preferred securities issued by each trust as of September 30, 2014 (in thousands):

Coal City

Capital Trust I

MB Financial

Capital Trust II

MB Financial

Capital Trust III

MB Financial

Capital Trust IV

Junior Subordinated Notes:

Principal balance

25,774

36,083

10,310

20,619

Annual interest rate

3-mo LIBOR + 1.80%

3-mo LIBOR + 1.40%

3-mo LIBOR + 1.50%

3-mo LIBOR + 1.52%

Stated maturity date

September 1, 2028

September 15, 2035

September 23, 2036

September 15, 2036

Call date

September 1, 2008

December 15, 2010

September 23, 2011

September 15, 2011

Trust Preferred Securities:

Face Value

25,000

35,000

10,000

20,000

Annual distribution rate

3-mo LIBOR + 1.80%

3-mo LIBOR + 1.40%

3-mo LIBOR + 1.50%

3-mo LIBOR + 1.52%

Issuance date

July 1998

August 2005

July 2006

August 2006

Distribution dates (1)

Quarterly

MB Financial

Capital Trust V

MB Financial

Capital Trust VI

FOBB

Statutory Trust III (2)

TAYC

Capital Trust II (3)

Junior Subordinated Notes:

Principal balance

30,928

23,196

5,155

41,238

Annual interest rate

3-mo LIBOR + 1.30%

3-mo LIBOR + 2.80%

3-mo LIBOR + 2.68%

Stated maturity date

December 15, 2037

October 30, 2037

January 23, 2034

June 17, 2034

Call date

December 15, 2012

October 30, 2012

January 23, 2009

June 17, 2009

Trust Preferred Securities:

Face Value

30,000

22,500

5,000

40,000

Annual distribution rate

3-mo LIBOR + 1.30%

3-mo LIBOR + 2.80%

3-mo LIBOR + 2.68%

Issuance date

September 2007

October 2007

December 2003

June 2004

Distribution dates (1)

Quarterly


(1)	All distributions are cumulative and paid in cash.


(2)	FOBB Statutory Trust III was established by First Oak Brook Bancshares, Inc. (“FOBB”) prior to the Company's acquisition of FOBB, and the junior subordinated notes issued by FOBB to FOBB Statutory Trust III were assumed by the Company upon completion of the acquisition.


(3)	TAYC Capital Trust II was established by Taylor Capital prior to the Company's acquisition of Taylor Capital, and the junior subordinated notes issued by Taylor Capital to TAYC Capital Trust II were assumed by the Company upon completion of the acquisition.

The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated notes at the stated maturity date or upon redemption of the junior subordinated notes. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related junior subordinated notes. The Company’s obligation under the junior subordinated notes and other relevant trust agreements, in aggregate, constitutes a full and unconditional guarantee by the Company of each trust’s obligations under the trust preferred securities issued by each trust. The Company has the right to defer payment of interest on the notes and, therefore, distributions on the trust preferred securities, for up to five years, but not beyond the stated maturity date in the table above. During any such deferral period the Company may not pay cash dividends on its stock and generally may not repurchase its stock.

On September 22, 2014, the Company redeemed the junior subordinated notes held by Taylor Capital Trust I and concurrently redeemed all of the issued and outstanding 9.75% TAYC Capital Trust I Preferred Securities. The aggregate liquidation amount of the trust preferred securities was $45.4 million. TAYC Capital Trust I was established by Taylor Capital prior to the Company's acquisition of Taylor Capital, and the junior subordinated notes issued by Taylor Capital to TAYC Capital Trust I were assumed by the Company upon completion of the acquisition. As a result, a $1.9 million gain on early extinguishment of this debt was recognized in the third quarter of 2014.


Note 12.	Commitments and Contingencies

Commitments: The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.

At September 30, 2014 and December 31, 2013, the following financial instruments were outstanding, the contractual amounts of which represent off-balance sheet credit risk (in thousands):



	Contractual Amount
	September 30, 2014		December 31, 2013
Commitments to extend credit:
Home equity lines	$	216,130	$	208,581
Other commitments	2,714,127		1,214,391
Letters of credit:
Standby	130,057		69,556
Commercial	6,370		708

The increase in commitments was primarily due to the Taylor Capital merger.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require a payment of a fee. The commitments for home equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

The Company, in the normal course of its business, regularly offers standby and commercial letters of credit to its bank customers. Standby and commercial letters of credit are a conditional but irrevocable form of guarantee. Under letters of credit, the Company typically guarantees payment to a third party beneficiary upon the default of payment or nonperformance by the bank customer and upon receipt of complying documentation from that beneficiary.

Both standby and commercial letters of credit may be issued for any length of time, but normally do not exceed a period of five years. These letters of credit may also be extended or amended from time to time depending on the bank customer’s needs. As of September 30, 2014, the maximum remaining term for any standby letters of credit was September 30, 2030. A fee is charged to the bank customer and is recognized as income over the life of the letter of credit, unless considered non-rebatable under the terms of a letter of credit application.

At September 30, 2014, the aggregate contractual amount of these letters of credit, which represents the maximum potential amount of future payments that the Company would be obligated to pay, increased $66.2 million to $136.4 million from $70.3 million at December 31, 2013. Of the $136.4 million in commitments outstanding at September 30, 2014, approximately $109.5 million of the letters of credit have been issued or renewed since December 31, 2013.

Letters of credit issued on behalf of bank customers may be done on either a secured, partially secured or an unsecured basis. If a letter of credit is secured or partially secured, the collateral can take various forms including bank accounts, investments, fixed assets, inventory, accounts receivable or real estate, among other things. The Company takes the same care in making credit

decisions and obtaining collateral when it issues letters of credit on behalf of its customers as it does when making other types of loans.

As of September 30, 2014, the Company had approximately $1.7 million in capital expenditure commitments outstanding which relate to various projects to renovate existing branches.

Concentrations of credit risk: The majority of the loans, commitments to extend credit and standby letters of credit have been granted to customers in the Company’s market area. As of September 30, 2014, approximately 27% of our investments in securities issued by states and political subdivisions were within the state of Illinois. We did not hold any direct exposure to the state of Illinois as of September 30, 2014. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Standby letters of credit are granted primarily to commercial borrowers. Lease banking provides banking services to lessors located throughout the United States. Our leasing subsidiaries originate leases to companies located through the United States.

Contingencies: In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from pending proceedings would not be expected to have a material adverse effect on the Company’s consolidated financial statements.

On July 26, 2013, an action captioned James Sullivan v. Taylor Capital Group, Inc., et al., Case No. 2013-CH17751 (the “Sullivan Action”) was commenced against Taylor Capital, the board of directors of Taylor Capital (the “Taylor Capital Board”), and MB Financial (collectively, the “Defendants”) in the Circuit Court of Cook County, Illinois (the “Court”), alleging that the Taylor Capital Board breached its fiduciary duties in connection with the MB Financial/Taylor Capital merger (the “Merger”) and that MB Financial aided and abetted those breaches of fiduciary duty. On August 8, 2013, a stockholder class action captioned Dennis Panozzo v. Taylor Capital Group, Inc., et. al., Case No. 2013-CH-18546 (the “Panozzo Action”) was commenced against the Defendants in the Court making similar allegations in connection with the Merger. Subsequently, on September 10, 2013, the Sullivan Action and the Panozzo Action were consolidated pursuant to Court order under the first-filed Sullivan Action, Case No. 2013-CH17751 (as so consolidated, the “Action”). On October 24, 2013, the plaintiffs in the Action (the “Plaintiffs”) filed a consolidated amended class action complaint, alleging that the Taylor Capital Board breached its fiduciary duties in connection with the Merger, including by making incomplete and misleading disclosures concerning the Merger, and that MB Financial aided and abetted those breaches of fiduciary duty.

On February 17, 2014, solely to eliminate the costs, risks, burden, distraction and expense of further litigation and to put the claims that were or could have been asserted to rest, the Defendants entered into a memorandum of understanding (the “MOU”) with the Plaintiffs regarding the settlement of the Action pursuant to which Taylor Capital and MB Financial agreed to make certain supplemental disclosures concerning the Merger, which each of Taylor Capital and MB Financial did in a Current Report on Form 8-K filed by each company on February 18, 2014 (the “Form 8-Ks”). On July 10, 2014, the parties entered into a definitive settlement agreement. The agreement provides that, solely for purposes of settlement, the Court will certify a class consisting of all persons who were record or beneficial stockholders of Taylor Capital when the Merger was approved by the Taylor Capital Board or any time thereafter (the “Class”). In addition, the agreement provides that, subject to approval by the Court after notice to the members of the Class (the “Class Members”), the Action will be dismissed with prejudice and all claims that the Class Members may possess with regard to the Merger, with the exception of claims for statutory appraisal, will be released. Class Members will be afforded an opportunity to opt out of the class solely with regard to any monetary claims they may possess. In connection with the settlement, the Plaintiffs’ counsel has expressed their intention to seek an award by the Court of attorneys’ fees and expenses. The amount of the award to the Plaintiffs’ counsel will ultimately be determined by the Court. This payment will not affect the amount of merger consideration paid by MB Financial or that any Taylor Capital stockholder received in the Merger. The proposed settlement has been presented to the Court, and received preliminary approval. It is expected that the proposed settlement will be presented to the Court for final approval on or about November 12, 2014. There can be no assurance that the Court will approve the settlement. In the absence of such approval, the proposed settlement will terminate.

The Defendants continue to believe that the Action is without merit, have vigorously denied, and continue to vigorously deny, all of the allegations of wrongful or actionable conduct asserted in the Action, and the Taylor Capital Board vigorously maintains that it diligently and scrupulously complied with its fiduciary duties, that the joint proxy statement/prospectus dated January 14, 2014 mailed to the stockholders of Taylor Capital and MB Financial was complete and accurate in all material respects and that no further disclosure was required under applicable law. The Defendants entered into the MOU and the settlement solely to eliminate the costs, risks, burden, distraction and expense of further litigation and to put the claims that were or could have been asserted to rest. Nothing in the MOU, any settlement agreement or any public filing, including the Form 8-Ks, shall be deemed an admission of the legal necessity of filing or the materiality under applicable laws of any of the additional information contained therein or in any public filing associated with the proposed settlement of the Action.

Based on information currently available, consultations with counsel and established reserves, management believes that the outcome of this litigation will not have a material adverse effect on the Company's consolidated financial position or results of operations.


Note 13.	Fair Value Measurements

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert expected future amounts, such as cash flows or earnings, to a single present value amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company's creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company's valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company's monthly and/or quarterly valuation process.

Financial Instruments Recorded at Fair Value on a Recurring Basis

Securities Available for Sale. The fair values of securities available for sale are determined by quoted prices in active markets, when available, and classified as Level 1. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities and classified as Level 2. In cases where significant credit valuation adjustments are incorporated into the estimation of fair value, reported amounts are classified as Level 3.

Loans Held for Sale. Mortgage loans originated and held for sale in the secondary market are carried at fair value. The fair value of loans held for sale is determined using quoted secondary market prices and classified as level 2.

Mortgage Servicing Rights. The Company has elected to record its mortgage servicing rights at fair value. Mortgage servicing rights do not trade in an active market with readily observable prices. Accordingly, the Company determines the fair value of mortgage servicing rights by estimating the fair value of the future cash flows associated with the mortgage loans being serviced. Key economic assumptions used in measuring the fair value of mortgage servicing rights include, but are not limited to, prepayment speeds, discount rates, delinquencies and cost to service. The assumptions used in the model are validated on a regular basis. The fair value is validated on a quarterly basis with an independent third party. Any discrepancies between the internal model and the third party validation are investigated and resolved by an internal committee. Due to the nature of the valuation inputs, mortgage servicing rights are classified in Level 3 of the fair value hierarchy.

Assets Held in Trust for Deferred Compensation and Associated Liabilities. Assets held in trust for deferred compensation are recorded at fair value and included in “Other Assets” on the consolidated balance sheets. These assets are invested in mutual funds and classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried at the fair value of the obligation to the employee, which corresponds to the fair value of the invested assets.

Derivatives. Currently, we use interest rate swaps to manage our interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative and classified as Level 2. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including LIBOR rate curves. We also obtain dealer quotations for these derivatives for comparative purposes to assess the reasonableness of the model valuations. We also use forward commitments to buy to-be-announced mortgage securities for which we do not intend to take delivery of the security and will enter into an offsetting position before physical delivery to lessen the price volatility of the mortgage servicing rights asset. Dealer quotations are used for these derivatives and are classified as Level 1. We also offer other derivatives, including foreign currency forward contracts and interest rate lock commitments, to our customers and offset our exposure from such contracts by purchasing other financial contracts, which are valued using market consensus prices. For certain interest rate lock commitments, the Company uses an external valuation model that relies on internally developed inputs to estimate the fair value of its interest rate lock commitments which is based on unobservable inputs that reflect management’s assumptions and specific information about each borrower transaction and is classified in Level 3 of the hierarchy.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):



	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2014
Financial assets
Securities available for sale:
U.S Government sponsored agencies and enterprises	$	65,829	$	—	$	65,829	$	—
States and political subdivisions	409,033		—		408,526		507
Residential mortgage-backed securities	801,940		—		801,392		548
Commercial mortgage-backed securities	204,162		—		204,162		—
Corporate bonds	267,239		—		266,940		299
Equity securities	10,447		10,447		—		—
Loans held for sale	553,627		—		553,627		—
Mortgage servicing rights	249,376		—		—		249,376
Assets held in trust for deferred compensation	16,408		16,408		—		—
Derivative financial instruments	33,953		138		30,288		3,527
Financial liabilities
Other liabilities ⁽¹⁾	16,062		16,062		—		—
Derivative financial instruments	34,492		2,112		32,380		—
December 31, 2013
Financial assets
Securities available for sale:
U.S. Government sponsored agencies and enterprises	$	52,068	$	—	$	52,068	$	—
States and political subdivisions	19,143		—		19,143		—
Residential mortgage-backed securities	701,233		—		700,542		691
Commercial mortgage-backed securities	52,941		—		52,941		—
Corporate bonds	283,070		—		277,905		5,165
Equity securities	10,457		10,457		—		—
Loans held for sale	629		—		629		—
Assets held in trust for deferred compensation	10,679		10,679		—		—
Derivative financial instruments	18,645		—		18,645		—
Financial liabilities
Other liabilities ⁽¹⁾	10,569		10,569		—		—
Derivative financial instruments	18,632		—		18,632		—


⁽¹⁾	Liabilities associated with assets held in trust for deferred compensation

The following table presents additional information about the unobservable inputs used in the fair value measurement of financial assets measured on a recurring basis that were categorized within the Level 3 of the fair value hierarchy:



	Fair Value at
	September 30, 2014		Valuation Technique	Unobservable Input	Range
	(in thousands)
States and political subdivisions	$	507	Discounted cash flows	Credit assumption	45% Loss
Residential mortgage-backed securities	548		Discounted cash flows	Constant pre-payment rates
				(CPR) assumption	1% - 3% CPR
Corporate bonds	299		Discounted cash flows	Credit assumption	20% Loss
Mortgage servicing rights	249,376		Discounted cash flows	CPR	4.3% - 23.7%
				Discount rate	10.00 - 16.25
				Maturity (months)	39 - 457
				Delinquencies	0.00 - 25.00
				Costs to service	$60 - $392
Derivative financial instruments (mortgage interest	3,527		Sales cash flows	Expected closing ratio	28.58 - 94.00
rate lock commitments)				Expected delivery price	96.58 - 109.54

The significant unobservable inputs used in the fair value measurement of the Company’s mortgage servicing rights include prepayment speeds, discount rates, maturities, delinquencies and cost to service. Significant increases in prepayment speeds, discount rates, delinquencies or cost to service would result in a significantly lower fair value measurement. Conversely, significant decreases in prepayment speeds, discount rates, delinquencies or costs to service would result in a significantly higher fair value measurement. With the exception of changes in delinquencies, which can change the cost to service, the unobservable inputs move independently of each other.

Key economic assumptions used in the measuring of the fair value of the mortgage servicing rights and the sensitivity of the fair value to immediate adverse changes in those assumptions at September 30, 2014 are presented in the following table. This table does not take into account the derivatives used to economically hedge the mortgage servicing rights.



(dollars in thousands, except for weighted average cost to service)	September 30, 2014
Weighted average prepayment speed (CPR)	9.10		%
Impact on fair value of 10% adverse change	$	(8,665	)
Impact on fair value of 20% adverse change	(16,778		)

Weighted average discount rate	10.11		%
Impact on fair value of 10% adverse change	$	(10,325	)
Impact on fair value of 20% adverse change	(19,857		)

Weighted average delinquency rate	1.35		%
Impact on fair value of 10% adverse change	$	(1,085	)
Impact on fair value of 20% adverse change	(1,755		)

Weighted average costs to service	$	70
Impact on fair value of 10% adverse change	(3,491		)
Impact on fair value of 20% adverse change	(6,981		)

The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the three or nine months ended September 30, 2014. The Company's policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfer between levels.

The following table presents additional information about financial assets measured at fair value on a recurring basis for which the Company used significant unobservable inputs (Level 3):



	Nine Months Ended
	September 30,
	2014			2013			2014		2013		2014			2013
(in thousands)	Investment Securities						Mortgage Servicing Rights				Derivatives
Balance, beginning of period	$	5,856		$	6,071		$	—	$	—	$	—		$	—
Acquired through business combination	507			—			232,783		—		5,922			—
Purchases	—			—			489		—		—			—
Originations	—			—			8,587		—		—			—
Other comprehensive income	(71		)	(59		)	7,517		—		(2,395		)	—
Principal payments	(281		)	(118		)	—		—		—			—
Impairment charge	(92		)	—			—		—		—			—
Transferred out of Level 3	(4,565		)	—			—		—		—			—
Balance, ending of period	$	1,354		$	5,894		$	249,376	$	—	$	3,527		$	—

Financial Instruments Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis in accordance with U.S. GAAP. These include assets that are measured at the lower of cost or fair value that were recognized at fair value below cost at the end of the period.

Impaired Loans. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. In accordance with ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. Collateral values are estimated using Level 3 inputs based on customized discounting criteria. For a majority of impaired real estate loans where an allowance is established based on the fair value of collateral (90% at September 30, 2014), the Company obtains a current external appraisal. Other valuation techniques are used as well, including internal valuations, comparable property analysis and contractual sales information.

Non-Financial Assets and Non-Financial Liabilities Recorded at Fair Value

The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis include foreclosed assets and non-financial long-lived assets.

Other Real Estate and Repossessed Vehicles Owned (Foreclosed Assets). Foreclosed assets, upon initial recognition, are measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. The fair value of foreclosed assets, upon initial recognition, are estimated using Level 3 inputs based on customized discounting criteria.

Non-Financial Long-Lived Assets. Non-financial long-lived assets, when determined to be impaired, are measured and reported at fair value using Level 3 inputs based on customized discounting criteria.

Assets measured at fair value on a nonrecurring basis as of September 30, 2014 and December 31, 2013 are included in the table below (in thousands):



	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2014
Financial assets:
Impaired loans	$	55,346	$	—	$	—	$	55,346
Non-financial assets:
Foreclosed assets	41,333		—		—		41,333
December 31, 2013
Financial assets:
Impaired loans	$	77,497	$	—	$	—	$	77,497
Non-financial assets:
Foreclosed assets	44,601		—		—		44,601

The following table presents additional information about the unobservable inputs used in the fair value measurement of financial assets measured on a nonrecurring basis that were categorized within the Level 3 of the fair value hierarchy:



	Fair Value at		Valuation	Unobservable
	September 30, 2014		Technique	Input	Range
	(in thousands)
Impaired loans	$	55,346	Appraisal of collateral	Appraisal adjustments - sales costs	5% - 10%
Foreclosed assets	41,333		Appraisal of collateral	Appraisal adjustments - sales costs	5% - 10%

ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The estimated fair value approximates carrying value for cash and cash equivalents, accrued interest and the cash surrender value of life insurance policies. The methodologies for other financial assets and financial liabilities are discussed below:

The following methods and assumptions were used by the Company in estimating the fair values of its other financial instruments:

Cash and due from banks, interest earning deposits with banks and federal funds sold: The carrying amounts reported in the balance sheet approximate fair value.

Securities held to maturity: The fair values of securities held to maturity are determined by quoted prices in active markets, when available, and classified as Level 1. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities and classified as Level 2. In cases where significant credit valuation adjustments are incorporated into the estimation of fair value, reported amounts are classified as Level 3.

Non-marketable securities - FHLB and FRB Stock: The carrying amounts reported in the balance sheet approximate fair value.

Loans Held for Sale: The fair value of loans held for sale is determined using quoted secondary market prices.

Loans: The fair values for loans are estimated using discounted cash flow analyses, using the corporate bond curve adjusted for liquidity for commercial loans and the swap curve adjusted for liquidity for retail loans.

Non-interest bearing deposits: The fair values disclosed are equal to their balance sheet carrying amounts, which represent the amount payable on demand.

Interest bearing deposits: The fair values disclosed for deposits with no defined maturities are equal to their carrying amounts, which represent the amounts payable on demand. Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies the Company's current incremental borrowing rates for similar terms.

Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements and other short-term borrowings with maturities of 90 days or less approximate their fair values. The fair value of short-term borrowings greater than 90 days is based on the discounted value of contractual cash flows.

Long-term borrowings: The fair values of the Company's long-term borrowings (other than deposits) are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.

Junior subordinated notes issued to capital trusts: The fair values of the Company's junior subordinated notes issued to capital trusts are estimated based on the quoted market prices, when available, of the related trust preferred security instruments, or are estimated based on the quoted market prices of comparable trust preferred securities.

Accrued interest: The carrying amount of accrued interest receivable and payable approximate their fair values.

Off-balance-sheet instruments: Fair values for the Company’s off-balance-sheet lending commitments (guarantees, letters of credit and commitments to extend credit) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements.

The estimated fair values of financial instruments are as follows (in thousands):



	September 30, 2014
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Financial Assets:
Cash and due from banks	$	267,405	$	267,405	$	267,405	$	—	$	—
Interest earning deposits with banks	179,391		179,391		179,391		—		—
Investment securities available for sale	1,758,650		1,758,650		10,447		1,746,849		1,354
Investment securities held to maturity	1,005,349		1,045,517		—		1,045,517		—
Non-marketable securities - FHLB and FRB stock	75,569		75,569		—		—		75,569
Loans held for sale	553,627		553,627		—		553,627		—
Loans, net	8,880,207		8,871,886		—		—		8,871,886
Accrued interest receivable	47,956		47,956		47,956		—		—
Derivative financial instruments	33,953		33,953		138		30,288		3,527
Financial Liabilities:
Noninterest bearing deposits	$	3,807,554	$	3,807,554	$	3,807,554	$	—	$	—
Interest bearing deposits	7,430,994		7,438,126		—		—		7,438,126
Short-term borrowings	667,160		667,156		—		—		667,156
Long-term borrowings	77,269		80,628		—		—		80,628
Junior subordinated notes issued to capital trusts	185,681		134,011		—		—		134,011
Accrued interest payable	3,420		3,420		3,420		—		—
Derivative financial instruments	34,492		34,492		2,112		32,380		—



	December 31, 2013
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets:
Cash and due from banks	$	205,193	$	205,193	$	205,193	$	—	$	—
Interest earning deposits with banks	268,266		268,266		268,266		—		—
Federal funds sold	42,950		42,950		42,950		—		—
Investment securities available for sale	1,118,912		1,118,912		10,457		1,102,599		5,856
Investment securities held to maturity	1,182,533		1,198,929		—		1,198,929		—
Non-marketable securities - FHLB and FRB stock	51,417		51,417		—		—		51,417
Loans held for sale	629		629		—		629		—
Loans, net	5,600,805		5,583,759		—		—		5,583,759
Accrued interest receivable	36,593		36,593		36,593		—		—
Derivative financial instruments	18,645		18,645		—		18,645		—
Financial Liabilities:
Non-interest bearing deposits	$	2,375,863	$	2,375,863	$	2,375,863	$	—	$	—
Interest bearing deposits	5,005,396		5,012,928		—		—		5,012,928
Short-term borrowings	493,389		493,384		—		—		493,384
Long-term borrowings	62,159		66,301		—		—		66,301
Junior subordinated notes issued to capital trusts	152,065		101,247		—		—		101,247
Accrued interest payable	2,042		2,042		2,042		—		—
Derivative financial instruments	18,632		18,632		—		18,632		—


Note 14.	Stock Incentive Plans

ASC Topic 718 requires that the grant date fair value of equity awards to employees be recognized as compensation expense over the period during which an employee is required to provide service in exchange for such award.

The following table summarizes the impact of the Company’s share-based payment plans in the financial statements for the periods shown (in thousands):



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
Total cost of share-based payment plans during the period	$	2,338	$	1,388	$	6,593	$	3,860
Amount of related income tax benefit recognized in income	922		548		2,592		$	1,530

The Company adopted the Omnibus Incentive Plan (the “Omnibus Plan”) in 1997. On May 28, 2014, the Company’s stockholders approved the third amendment and restatement of the Omnibus Plan to add 3,100,000 authorized shares for a total of 11,400,000 shares of common stock authorized to be utilized in connection with awards under the Omnibus Plan to directors, officers, and employees of the Company or any of its subsidiaries. The amended and restated plan also authorized an additional 2,400,000 shares upon completion of the Taylor Capital merger increasing the total number of shares authorized to 13,800,000. Equity grants under the Omnibus Plan can be in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, and other stock-based awards. Shares awarded in the form of restricted stock, restricted stock units, performance shares, performance units, or other stock-based awards generally will reduce the shares available under the Omnibus Plan on a 2-for-1 basis. Following May 28, 2014, no more than 10% of the total number of authorized shares may be issued with respect to awards granted after that date, other than stock appreciation rights, stock options and performance-based awards, which at the date of grant are scheduled to fully vest prior to three years from the date of grant (although such awards may provide scheduled vesting earlier with respect to some of such shares and for acceleration of vesting as provided in the Omnibus Plan). As of September 30, 2014, there were 6,214,365 shares available for future grants.

Prior to 2014, annual equity-based incentive awards were typically granted to selected officers and employees mid-year. In 2014, these awards began being granted in the first quarter of the year. Options are granted with an exercise price equal to no less than the market price of the Company’s shares at the date of grant; those option awards generally vest over four years of service and have 10-year contractual terms. Restricted shares and units typically vest over a two to four year period. Equity awards may also be granted at other times throughout the year in connection with the recruitment and retention of officers and employees. Directors currently may elect, in lieu of cash, to receive up to 70% of their fees in stock options with a five year term, which are fully vested on the grant date (provided that the director may not sell the underlying shares for at least six months after the grant date), and up to 100% of their fees in restricted shares, which vest one year after the grant date.

The following table summarizes stock options outstanding for the nine months ended September 30, 2014:



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (In Years)	Aggregate Intrinsic Value (in thousands)
Options outstanding as of December 31, 2013	2,443,752		$	27.57
Granted	221,216		29.47
Exercised	(163,138	)	18.90
Expired or cancelled	(156,104	)	35.78
Forfeited	(26,313	)	21.81
Options outstanding as of September 30, 2014	2,319,413		$	27.87	4.66	$	6,755
Options exercisable as of September 30, 2014	1,742,430		$	28.91	3.49	$	4,684

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model based on certain assumptions. Expected volatility is based on historical volatility and the expectations of future volatility of Company shares. The risk free interest rate for periods within the contractual term of the option is based on the U.S. Treasury yield curve in effect at the

time of the grant. The expected life of options is estimated based on historical employee behavior and represents the period of time that options granted are expected to remain outstanding.

The following assumptions were used for options granted during the nine months ended September 30, 2014:



	September 30, 2014
Risk-free interest rate	1.83		%
Expected volatility of Company’s stock	23.10		%
Expected dividend yield	1.65		%
Expected life of options	5.6 years
Weighted average fair value per option of options granted during the year	$	5.93

The total intrinsic value of options exercised during the nine months ended September 30, 2014 and 2013 was $1.6 million and $929 thousand, respectively.

The following is a summary of changes in restricted shares and units for the nine months ended September 30, 2014:



	Number of Shares and Units		Weighted Average Grant Date Fair Value
Shares Outstanding at December 31, 2013	685,719		$	22.59
Granted	442,251		29.22
Vested	(298,533	)	20.41
Forfeited	(17,611	)	24.58
Shares Outstanding at September 30, 2014	811,826		$	26.96

The total intrinsic value of restricted shares that vested during the nine months ended September 30, 2014 and 2013 was $8.4 million and $5.7 million, respectively.

The Company issued 48,569, 56,752 and 65,333 market-based restricted stock units in 2014, 2013 and 2012, respectively, which entitle recipients to shares of common stock at the end of a three year vesting period. Recipients will earn shares, totaling between 0% and 175% of the number of units issued, based on the Company's total stockholder return relative to a specified peer group of financial institutions over the three year period. The market-based restricted stock units are included in the preceding table as if the recipients earned shares equal to 100% of the units issued. A Monte Carlo simulation model was used to value the market-based restricted stock units at the time of issuance.

The Company issued 92,717 shares of market-based restricted stock in 2011. The market component of the vesting terms for the award requires that, for ten consecutive trading days, the closing price of the Company’s stock be at least $27.00. The market component for this award has been satisfied and vested in full in the third quarter of 2014, on the third anniversary of the grant date. A Monte Carlo simulation model was used to value the market-based restricted stock awards at the time of issuance.

As of September 30, 2014, there was $19.8 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements (including share option and nonvested share awards) granted under the Omnibus Plan. At September 30, 2014, the weighted-average period over which the unrecognized compensation expense is expected to be recognized was approximately 2.5 years.


Note 15.	Derivative Financial Instruments

The Company offers various derivatives, including interest rate swaps and foreign currency forward contracts, to our customers which can mitigate our exposure to market risk through the execution of off-setting positions with inter-bank dealer counterparties. This also permits the Company to offer customized risk management solutions to our customers. These customer accommodations and any offsetting financial contracts are treated as non-designated derivative instruments and carried at fair value through an adjustment to the income statement.

Interest rate swap and foreign currency forward contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. The net amount payable or receivable under interest rate swaps is accrued as an adjustment to interest income. The net amount payable as of September 30, 2014 was approximately $964 thousand, and the net amount payable as of December 31, 2013 was approximately $25 thousand. The Company's credit exposure on interest rate swaps is limited to the Company's net favorable value and interest payments of all swaps to each counterparty. In such cases, collateral is generally required from the counterparties involved if the net value of the swaps exceeds a nominal amount. At September 30, 2014, the Company’s credit exposure relating to interest rate swaps was approximately $18.8 million, which is secured by the underlying collateral on customer loans.

The Company also enters into mortgage banking derivatives which are classified as non-designated derivatives. These derivatives include interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market and forward commitments for the future delivery of such loans. It is the Company's practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on its commitments to fund the loans as well as on its portfolio of mortgage loans held-for-sale.

The Company had fair value commercial loan interest rate swaps, to hedge its interest rate risk, with an aggregate notional amount of $208 thousand at September 30, 2014. For fair value hedges, the changes in fair values of both the hedging derivative and the hedged item were recorded in current earnings as non-interest income.

Interest rate swaps are used in order to lessen the price volatility of the mortgage servicing rights asset. The Company also uses forward commitments to buy to-be-announced mortgage securities for which the Company does not intend to take delivery of the security and will enter into an offsetting position before physical delivery to lessen the price volatility of the mortgage servicing rights asset. These derivatives are recorded at their fair value on the consolidated balance sheets in other assets with changes in fair value recorded on the consolidated statements of income in mortgage banking revenue in non-interest income.

The Company’s derivative financial instruments are summarized below as of September 30, 2014 and December 31, 2013 (in thousands):



	Asset Derivatives								Liability Derivatives
	September 30, 2014				December 31, 2013				September 30, 2014					December 31, 2013
	Notional		Estimated		Notional		Estimated		Notional		Estimated			Notional		Estimated
	Amount		Fair Value		Amount		Fair Value		Amount		Fair Value			Amount		Fair Value
Derivative instruments designated as hedges of fair value:
Interest rate swap contracts (1)	$	238,000	$	3,512	$	—	$	—	$	317,208	$	(5,399	)	$	238	$	(23	)
Stand-alone derivative instruments (2)
Interest rate swap contracts	983,309		24,441		550,883		17,298		984,081		(24,787		)	551,798		(17,350		)
Interest rate options contracts	56,105		401		83,907		323		56,105		(401		)	84,953		(323		)
Foreign exchange contracts	22,866		1,270		31,361		1,006		20,392		(1,138		)	47,760		(935		)
Spot foreign exchange contracts	768		9		—		—		1,256		(18		)	—		—
Mortgage related derivatives	1,004,855		4,320		1,783		18		723,233		(2,749		)	250		(1		)
Total non-hedging derivative instruments	2,067,903		30,441		667,934		18,645		1,785,067		(29,093		)	684,761		(18,609		)
Total	$	2,305,903	$	33,953	$	667,934	$	18,645	$	2,102,275	$	(34,492	)	$	684,999	$	(18,632	)

(1) Hedged mortgage servicing rights asset and fixed-rate commercial real estate loans

(2) These portfolio swaps are not designated as hedging instruments under ASC Topic 815.

Amounts included in the other income in the consolidated statements of operations related to derivative financial instruments were as follows (in thousands):



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Derivative instruments designated as hedges of fair value:
Interest rate swap contracts	$	(1,869	)	$	(1	)	$	(1,871	)	$	9
Stand-alone derivative instruments:
Interest rate swap contracts	(312		)	7			(294		)	30
Interest rate options contracts	—			—			—			—
Foreign exchange contracts	4			(12		)	61			(7		)
Spot foreign exchange contracts	(17		)	—			(9		)	—
Mortgage related derivatives	1,514			(16		)	1,554			(80		)
Total non-hedging derivative instruments	1,189			(21		)	1,312			(57		)
Total	$	(680	)	$	(22	)	$	(559	)	$	(48	)

Methods and assumptions used by the Company in estimating the fair value of its interest rate swaps are discussed in Note 13 to consolidated financial statements.

Certain instruments and transactions subject to an agreement similar to a master netting arrangement are eligible for offset in the consolidated balance sheet. The instruments and transactions would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The Company’s derivative transactions with financial institution counterparties are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions. Under these agreements, there is generally a legally enforceable right to offset recognized amounts, and there may be an intention to settle such amounts on a net basis. The Company, however, does not generally offset such financial instruments for financial reporting purposes.

Information about the Company's financial instruments that are eligible for offset in the consolidated balance sheet as of September 30, 2014 is summarized below (in thousands):



	Financial Assets						Financial Liabilities
	Gross Amount Recognized		Gross Amount Offset		Net Amount Recognized		Gross Amount Recognized		Gross Amount Offset		Net Amount Recognized
Derivatives:
Interest rate swaps, caps and floors	$	6,539	$	—	$	6,539	$	27,562	$	—	$	27,562
Foreign currency forward contracts	840		—		840		379		—		379
Mortgage related derivatives	734		—		734		2,709		—		2,709
Total derivatives	8,113		—		8,113		30,650		—		30,650
Repurchase agreements	—		—		—		248,150		—		248,150
Total	$	8,113	$	—	$	8,113	$	278,800	$	—	$	278,800



	Financial Assets									Financial Liabilities
	Net Amount Recognized		Financial Instruments			Collateral		Net Amount		Net Amount Recognized		Financial Instruments			Collateral			Net Amount
Derivatives:
Counterparty A	$	172	$	(172	)	$	—	$	—	$	8,578	$	(172	)	$	(8,406	)	$	—
Counterparty B	3,792		(3,792		)	—		—		8,680		(3,792		)	(4,888		)	—
Counterparty C	5		(5		)	—		—		4,125		(5		)	(4,120		)	—
Other counterparties	4,144		(3,755		)	—		389		9,267		(3,755		)	(5,134		)	378
Total derivatives	8,113		(7,724		)	—		389		30,650		(7,724		)	(22,548		)	378
Repurchase agreements	—		—			—		—		248,150		—			(248,150		)	—
Total	$	8,113	$	(7,724	)	$	—	$	389	$	278,800	$	(7,724	)	$	(270,698	)	$	378

Information about the Company's financial instruments that are eligible for offset in the consolidated balance sheet as of December 31, 2013 is summarized below (in thousands):



	Financial Assets						Financial Liabilities
	Gross Amount Recognized		Gross Amount Offset		Net Amount Recognized		Gross Amount Recognized		Gross Amount Offset		Net Amount Recognized
Derivatives:
Interest rate swaps, caps and floors	$	5,792	$	—	$	5,792	$	11,904	$	—	$	11,904
Foreign currency forward contracts	80		—		80		848		—		848
Mortgage related derivatives	3		—		3		1		—		1
Total derivatives	5,875		—		5,875		12,753		—		12,753
Repurchase agreements	—		—		—		193,389		—		193,389
Total	$	5,875	$	—	$	5,875	$	206,142	$	—	$	206,142



	Financial Assets									Financial Liabilities
	Net Amount Recognized		Financial Instruments			Collateral		Net Amount		Net Amount Recognized		Financial Instruments			Collateral			Net Amount
Derivatives:
Counterparty A	$	883	$	(883	)	$	—	$	—	$	10,669	$	(883	)	$	(9,786	)	$	—
Counterparty B	1,836		(412		)	—		1,424		412		(412		)	—			—
Counterparty C	2,380		(1,612		)	—		768		1,612		(1,612		)	—			—
Other counterparties	776		(5		)	—		771		60		(5		)	—			55
Total derivatives	5,875		(2,912		)	—		2,963		12,753		(2,912		)	(9,786		)	55
Repurchase agreements	—		—			—		—		193,389		—			(193,389		)	—
Total	$	5,875	$	(2,912	)	$	—	$	2,963	$	206,142	$	(2,912	)	$	(203,175	)	$	55


Note 16.	Operating Segments

The Company's operations consist of three reportable operating segments: banking, leasing and mortgage banking. The Company offers different products and services through its three segments. The accounting policies of the segments are generally the same as those of the consolidated company.

The banking segment generates its revenues primarily from its lending and deposit gathering activities. The profitability of this segment's operations depends primarily on its net interest income after provision for credit losses, which is the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities less provision for credit losses. The provision for credit losses is dependent on changes in its loan portfolio and management’s assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions. The banking segment is also subject to an extensive system of laws and regulations that are intended primarily for the protection of customers and depositors. These laws and regulations govern such areas as capital, permissible activities, allowance for loan losses, loans and investments, and rates of interest that can be charged on loans.

The leasing segment generates its revenues through lease originations and related services offered through the Company's leasing subsidiaries, LaSalle Systems Leasing, Inc., Celtic Leasing Corp. and Cole Taylor Equipment Finance. The leasing subsidiaries invest directly in equipment that we lease (referred to as direct finance, leveraged or operating leases) to "Fortune 1000," large middle-market companies and healthcare providers located throughout the United States. The lease portfolio is made up of various kinds of equipment, generally technology related, such as computer systems, satellite equipment, medical equipment and general manufacturing equipment. The leasing subsidiaries also specialize in selling third party equipment maintenance contracts to large companies.

The mortgage banking segment originates mortgage loans for sale to investors and for the Company's portfolio through its retail and broker channels. This segment also services residential mortgage loans for various investors and for loans owned by the Company. The mortgage banking segment is also subject to an extensive system of laws and regulations that are intended primarily for the protection of customers.

Net interest income for the leasing segment includes adjustments based on the Company's internal funds transfer pricing model as well as interest on loans originated for the sole purpose of funding equipment purchases related to leases at the Company's lease subsidiaries. The provision for credit losses and non-interest expense for the leasing segment includes adjustments for internal allocations of certain expenses.

The following tables present summary financial information for the reportable segments (in thousands):



	Banking			Leasing			Mortgage Banking			Consolidated
Three months ended September 30, 2014
Net interest income	$	88,863		$	3,216		$	3,533		$	95,612
Provision for credit losses	3,172			(58		)	(5		)	3,109
Non-interest income	27,965			16,299			16,823			61,087
Non-interest expense ⁽¹⁾	117,325			9,721			15,155			142,201
Income tax expense	(1,287		)	3,693			2,082			4,488
Net income	$	(2,382	)	$	6,159		$	3,124		$	6,901
Total assets	$	13,212,350		$	490,690		$	803,003		$	14,506,043
Three months ended September 30, 2013
Net interest income	$	67,433		$	1,475		$	—		$	68,908
Provision for credit losses	(3,348		)	44			—			(3,304		)
Non-interest income	23,484			14,046			177			37,707
Non-interest expense	67,873			8,392			—			76,265
Income tax expense	6,402			2,781			71			9,254
Net income	$	19,990		$	4,304		$	106		$	24,400
Total assets	$	8,873,765		$	383,853		$	—		$	9,257,618



	Banking			Leasing			Mortgage Banking			Consolidated
Nine months ended September 30, 2014
Net interest income	$	219,248		$	8,231		$	3,533		$	231,012
Provision for credit losses	2,488			(174		)	(5		)	2,309
Non-interest income	77,842			42,716			17,069			137,627
Non-interest expense ⁽¹⁾	252,952			28,171			15,155			296,278
Income tax expense	9,345			8,649			2,082			20,076
Net income	$	32,305		$	14,301		$	3,370		$	49,976
Total assets	$	13,212,350		$	490,690		$	803,003		$	14,506,043
Nine months ended September 30, 2013
Net interest income	$	200,571		$	3,502		$	—		$	204,073
Provision for credit losses	(2,930		)	126			—			(2,804		)
Non-interest income	69,698			44,329			1,322			115,349
Non-interest expense	193,182			24,765			—			217,947
Income tax expense	20,411			8,740			529			29,680
Net income	$	59,606		$	14,200		$	793		$	74,599
Total assets	$	8,873,765		$	383,853		$	—		$	9,257,618


⁽¹⁾	Includes merger related expenses of $27.2 million and $28.3 million in the banking segment for the three and nine months ended September 30, 2014, respectively.


Note 17.	Preferred Stock

On August 18, 2014, in connection with the Taylor Capital merger, the Company issued one share of its Perpetual Non-Cumulative Preferred Stock, Series A (“Company Series A Preferred Stock”), in exchange for each of the 4,000,000 outstanding shares of Taylor Capital’s Perpetual Non-Cumulative Preferred Stock, Series A. Holders of the Company Series A Preferred Stock are entitled to receive, when as and if declared by the Company’s board of directors, non-cumulative cash dividends on the liquidation preference, which is $25 per share, at a rate of 8.00% per annum, payable quarterly. The Company Series A Preferred Stock is included in Tier 1 capital for regulatory capital purposes.


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion and analysis of MB Financial, Inc.’s financial condition and results of operations and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. The words “the Company,” “we,” “our” and “us” refer to MB Financial, Inc. and its consolidated subsidiaries, unless we indicate otherwise.

Overview

The profitability of our operations depends primarily on our net interest income after provision for credit losses, which is the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities less provision for credit losses. The provision for credit losses is dependent on changes in our loan portfolio and management’s assessment of the collectability of our loan portfolio as well as prevailing economic and market conditions.

Our net income is also affected by non-interest income and non-interest expenses. During the periods under report, non-interest income included revenue from our key fee initiatives: capital markets and international banking fees, commercial deposit and treasury management fees, net lease financing income, trust and asset management fees, card fees and mortgage banking revenue. Non-interest income also included loan service fees, consumer and other deposit service fees, brokerage fees, net gain (loss) on investment securities, increase in cash surrender value of life insurance, net gain (loss) on sale of assets, accretion of the FDIC indemnification asset, net gains on sale of loans and other operating income. During the periods under report, non-interest expenses included salaries and employee benefits, occupancy and equipment expense, computer services and telecommunication expense, advertising and marketing expense, professional and legal expense, other intangibles amortization expense, net loss (gain) on other real estate owned and other expenses (net of rental income) and other operating expenses.

Net interest income is affected by changes in the volume and mix of interest earning assets, interest earned on those assets, the volume and mix of interest bearing liabilities and interest paid on interest bearing liabilities. Non-interest income and non-interest expenses are impacted by growth of banking, leasing and mortgage banking operations and growth in the number of loan and deposit accounts through both acquisitions and core banking and leasing business growth. Growth in operations affects other expenses primarily as a result of additional employee, branch facility and promotional marketing expense. Growth in the number of loan and deposit accounts affects other income, including service fees as well as other expenses such as computer services, supplies, postage, telecommunications and other miscellaneous expenses. Non-performing asset levels impact salaries and benefits, legal expenses and other real estate owned expenses.

On August 18, 2014, the Company completed the Taylor Capital Group, Inc. ("Taylor Capital") merger. Consideration paid was $639.8 million, including $519.3 million in common stock and $120.5 million in cash. The Company issued 19.6 million shares of common stock as a result of the merger. In addition, each share of Taylor Capital’s Perpetual Non-Cumulative Preferred Stock, Series A was converted into one share of the Company's Perpetual Non-Cumulative Preferred Stock, Series A with substantially identical terms. The results of operations acquired from Taylor Capital have been included in the Company's results of operations for the 44 days since the date of acquisition.

The Company had net income of $6.9 million for the three months ended September 30, 2014 compared to net income of $24.4 million for the three months ended September 30, 2013. Net income available to common stockholders was $4.9 million for the three months ended September 30, 2014. Fully diluted earnings per common share were $0.08 for the three months ended September 30, 2014 compared to $0.44 per common share for the three months ended September 30, 2013.

The Company had net income of $50.0 million for the nine months ended September 30, 2014 compared to net income of $74.6 million for the nine months ended September 30, 2013. Net income available to common stockholders was $48.0 million for the nine months ended September 30, 2014. Fully diluted earnings per common share were $0.82 for the nine months ended September 30, 2014 compared to $1.36 per common share for the nine months ended September 30, 2013.

The results of operations for the three and nine months ended September 30, 2014 were also impacted by $27.2 million and $28.3 million in merger related expenses, respectively. See "Non-interest Expenses" section for a detailed schedule of merger related expenses. In addition, our results of operations for the periods were affected by $10.6 million in contingent consideration expense that we recognized in the third quarter of 2014. In December 2012, we acquired Celtic Leasing Corp. ("Celtic"). The purchase consideration paid to Celtic's selling shareholders included the right to receive certain contingent payments based on the realization of residuals owned by Celtic on the transaction closing date. Given Celtic's stronger than expected lease residual performance subsequent to the acquisition, we have increased the fair value of the residual based contingent consideration by $10.6 million.

In September 2014, we repositioned our balance sheet and shortened the duration of our investment securities portfolio to pre-merger levels by selling $451.6 million in investment securities and utilizing the proceeds from the sales to reduce short term FHLB advances. A $3.2 million loss was recognized on investment securities in the third quarter of 2014 as a result of this balance sheet repositioning.

In September 2014, we also redeemed all of the outstanding 9.75% junior subordinated notes relating to the trust preferred securities of TAYC Capital Trust I. These notes were originally issued by Taylor Capital and were assumed by us in connection with the merger. The TAYC Capital Trust I trust preferred securities, which had an aggregate outstanding liquidation amount of $45.4 million, were automatically redeemed as a result of our redemption of the junior subordinated notes. A $1.9 million gain on the early extinguishment of the trust preferred securities was recorded in other operating income in the third quarter of 2014, which represented the difference between the fair market value of these securities on August 18, 2014 and their aggregate liquidation amount at redemption.

Critical Accounting Policies

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industries in which we operate. This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. Management believes the following policies are both important to the portrayal of our financial condition and results of operations and require subjective or complex judgments; therefore, management considers the following to be critical accounting policies. Management has reviewed the application of these polices with the Compliance and Audit Committee of our Board of Directors.

Allowance for Loan Losses. The allowance for loan losses is subject to the use of estimates, assumptions, and judgments in management's evaluation process used to determine the adequacy of the allowance for loan losses, which combines several factors: management's ongoing review and grading of the loan portfolio, consideration of past loan loss experience, trends in past due and non-performing loans, risk characteristics of the various classifications of loans, existing economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect probable credit losses. Because current economic conditions can change and future events are inherently difficult to predict, the anticipated amount of estimated loan losses, and therefore the adequacy of the allowance, could change significantly. As an integral part of their examination process, various regulatory agencies also review the allowance for loan losses. Such agencies may require that certain loan balances be charged off when their credit evaluations differ from those of management or require that adjustments be made to the allowance for loan losses, based on their judgments about information available to them at the time of their examination. We believe the allowance for loan losses is appropriate and properly recorded in the financial statements. See “Allowance for Loan Losses” section below for further analysis.

Residual Value of Our Direct Finance, Leveraged, and Operating Leases. Lease residual value represents the present value of the estimated fair value of the leased equipment at the termination date of the lease. Realization of these residual values depends on many factors, including management’s use of estimates, assumptions, and judgment to determine such values. Several other factors outside of management’s control may reduce the residual values realized, including general market conditions at the time of expiration of the lease, whether there has been technological or economic obsolescence or unusual wear and tear on, or use of, the equipment and the cost of comparable equipment. If, upon the expiration of a lease, we sell the equipment and the amount realized is less than the recorded value of the residual interest in the equipment, we will recognize a loss reflecting the difference. On a quarterly basis, management reviews the lease residuals for potential impairment. If we fail to realize our aggregate recorded residual values, our financial condition and profitability could be adversely affected. At September 30, 2014, the aggregate residual value of the equipment leased under our direct finance, leveraged, and operating leases totaled $114.8 million. See Note 1 and Note 6 of our December 31, 2013 audited consolidated financial statements contained in our Annual Report Form 10-K for the year ended December 31, 2013 for additional information.

Income Tax Accounting. ASC Topic 740 provides guidance on accounting for income taxes by prescribing the minimum recognition threshold that a tax position must meet to be recognized in the financial statements. ASC Topic 740 also provides guidance on measurement, recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of September 30, 2014, the Company had $1.0 million of uncertain tax positions. The Company elects to treat interest and penalties recognized for the underpayment of income taxes as income tax expense. However, interest and penalties

imposed by taxing authorities on issues specifically addressed in ASC Topic 740 will be taken out of the tax reserves up to the amount allocated to interest and penalties. The amount of interest and penalties exceeding the amount allocated in the tax reserves will be treated as income tax expense. As of September 30, 2014, the Company had approximately $10 thousand of accrued interest related to tax reserves. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of, and guidance surrounding income tax laws and regulations change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income.

Fair Value of Assets and Liabilities. ASC Topic 820 defines fair value as the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date.

The degree of management judgment involved in determining the fair value of assets and liabilities is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. In addition, changes in market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, the Company would use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement.

See Note 13 to the consolidated financial statements for a complete discussion on the Company’s use of fair valuation of assets and liabilities and the related measurement techniques.

Goodwill. The excess of the cost of an acquisition over the fair value of the net assets acquired consists of goodwill, and core deposit and client relationship intangibles. See Note 8 of our December 31, 2013 audited consolidated financial statements contained in our Annual Report Form 10-K for the year ended December 31, 2013 for further information regarding core deposit and client relationship intangibles. The Company reviews goodwill to determine potential impairment annually, or more frequently if events and circumstances indicate that goodwill might be impaired, by comparing the carrying value of the reporting units with the fair value of the reporting units.

The Company’s annual assessment date for goodwill impairment testing is as of December 31. Goodwill is tested for impairment at the reporting unit level. The Company has three reporting units: banking, leasing and mortgage banking. No impairment losses were recognized during the three or nine months ended September 30, 2014 and 2013. We are not aware of any events or circumstances subsequent to our annual goodwill impairment testing date of December 31, 2013 that would indicate impairment of goodwill at September 30, 2014. The carrying amount of goodwill was $698.9 million at September 30, 2014 and $423.4 million at December 31, 2013. The increase of $275.6 million in goodwill was due to the Taylor Capital merger.

Valuation of Mortgage Servicing Rights. The Company originates and sells residential mortgage loans in the secondary market and may retain the right to service the loans sold. Servicing involves the collection of payments from individual borrowers and the distribution of those payments to the investors. Upon a sale of mortgage loans for which servicing rights are retained, the retained mortgage servicing rights asset is capitalized at the fair value of future net cash flows expected to be realized for performing servicing activities. Purchased mortgage servicing rights are recorded at the purchase price at the date of purchase and at fair value thereafter.

Mortgage servicing rights do not trade in an active market with readily observable prices. The Company determines the fair value of mortgage servicing rights by estimating the fair value of the future cash flows associated with the mortgage loans being serviced. Key economic assumptions used in measuring the fair value of mortgage servicing rights include, but are not limited to, prepayment speeds, discount rates, delinquencies and cost to service. The assumptions used in the valuation model are validated on a periodic basis. The fair value is validated on a quarterly basis with an independent third party. Material discrepancies between the internal valuation and the third party valuation are analyzed and an internal committee determines whether or not an adjustment is required.

The Company has elected to account for mortgage servicing rights using the fair value option. Changes in the fair value are recognized in mortgage banking revenue on the Company's Consolidated Statements of Income.

Recent Accounting Pronouncements. Refer to Note 2 of our consolidated financial statements for a description of recent accounting pronouncements including the respective dates of adoption and anticipated effects on results of operations and financial condition.

Net Interest Income

The following tables present, for the periods indicated, the total dollar amount of interest income from average interest earning assets and the related yields, as well as the interest expense on average interest bearing liabilities, and the related costs, expressed both in dollars and rates (dollars in thousands). The tables below and the discussion that follows contain presentations of net interest income and net interest margin on a tax-equivalent basis, which is adjusted for the tax-favored status of income from certain loans and investments. We believe this measure to be the preferred industry measurement of net interest income, as it provides a relevant comparison between taxable and non-taxable amounts.

Reconciliations of net interest income and net interest margin on a tax-equivalent basis to net interest income and net interest margin in accordance with accounting principles generally accepted in the United States of America are provided in the table.



	Three Months Ended September 30,
(dollars in thousands)	2014						2013
	Average				Yield/		Average				Yield/
	Balance		Interest		Rate		Balance		Interest		Rate
Interest Earning Assets:
Loans held for sale	$	313,695	$	2,826	3.60	%	$	1,972	$	—	—	%
Loans (1) (2) (3)	6,862,043		77,077		4.56		5,194,976		57,325		4.38
Loans exempt from federal income taxes (4)	320,049		3,484		4.26		360,060		4,293		4.67
Taxable investment securities	1,726,352		11,028		2.56		1,292,366		6,330		1.96
Investment securities exempt from federal income taxes (4)	1,087,340		13,908		5.12		946,396		12,577		5.32
Federal funds sold	15,460		14		0.38		6,793		7		0.40
Other interest earning deposits	341,758		211		0.24		316,210		193		0.24
Total interest earning assets	10,666,697		$	108,548	4.04		8,118,773		$	80,725	3.94
Non-interest earning assets	1,539,333						1,142,518
Total assets	$	12,206,030					$	9,261,291
Interest Bearing Liabilities:
Deposits:
NOW and money market deposit	$	3,518,315	$	1,469	0.17	%	$	2,695,479	$	862	0.13	%
Savings deposit	906,630		128		0.06		844,647		137		0.06
Time deposits	1,828,752		3,018		0.65		1,572,987		3,434		0.87
Short-term borrowings	570,248		231		0.16		205,946		112		0.22
Long-term borrowings and junior subordinated notes	272,458		2,003		2.88		215,041		1,367		2.49
Total interest bearing liabilities	7,096,403		$	6,849	0.38		5,534,100		$	5,912	0.42
Non-interest bearing deposits	3,175,513						2,258,357
Other non-interest bearing liabilities	268,028						171,336
Stockholders’ equity	1,666,086						1,297,498
Total liabilities and stockholders’ equity	$	12,206,030					$	9,261,291
Net interest income/interest rate spread (5)			$	101,699	3.66	%			$	74,813	3.52	%
Less: taxable equivalent adjustment			6,087						5,905
Net interest income, as reported			$	95,612					$	68,908
Net interest margin (6)					3.56	%					3.37	%
Tax equivalent effect					0.22	%					0.29	%
Net interest margin on a fully tax equivalent basis (6)					3.78	%					3.66	%

(1) Non-accrual loans are included in average loans.

(2) Interest income includes amortization of net deferred loan origination fees and costs.

(3) Loans held for sale are included in the average loan balance listed. Related interest income is included in loan interest income.

(4) Non-taxable loan and investment income is presented on a fully tax equivalent basis assuming a 35% tax rate.

(5) Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.

(6) Net interest margin represents net interest income as a percentage of average interest earning assets.

Net interest income and net interest margin on a fully tax equivalent basis for the three and nine months ended September 30, 2014 were impacted by the Taylor Capital merger. Net interest income on a fully tax equivalent basis increased $26.9 million during the three months ended September 30, 2014 compared to the three months ended September 30, 2013. The net interest margin, expressed on a fully tax equivalent basis, was 3.78% for the third quarter of 2014 and 3.66% for the third quarter of 2013.



	Nine Months Ended September 30,
(dollars in thousands)	2014						2013
	Average				Yield/		Average				Yield/
	Balance		Interest		Rate		Balance		Interest		Rate
Interest Earning Assets:
Loans held for sale	$	105,977	$	2,826	3.56	%	$	3,259	$	—	—	%
Loans (1) (2) (3)	5,787,427		184,672		4.27		5,289,237		173,217		4.38
Loans exempt from federal income taxes (4)	320,263		10,490		4.37		327,618		11,188		4.50
Taxable investment securities	1,516,281		27,968		2.46		1,383,975		18,749		1.81
Investment securities exempt from federal income taxes (4)	997,128		39,066		5.22		930,653		37,537		5.38
Federal funds sold	8,605		23		0.37		3,249		9		0.37
Other interest bearing deposits	326,226		601		0.25		232,529		420		0.24
Total interest earning assets	9,061,907		$	265,646	3.92		8,170,520		$	241,120	3.95
Non-interest earning assets	1,331,812						1,162,210
Total assets	$	10,393,719					$	9,332,730
Interest Bearing Liabilities:
Deposits:
NOW and money market deposit	$	3,045,178	$	3,216	0.14	%	$	2,702,567	$	2,622	0.13	%
Savings deposit	879,336		334		0.05		835,754		409		0.07
Time deposits	1,548,468		8,588		0.74		1,692,760		12,243		0.97
Short-term borrowings	319,697		426		0.18		195,677		395		0.27
Long-term borrowings and junior subordinated notes	243,659		4,725		2.56		226,133		4,324		2.52
Total interest bearing liabilities	6,036,338		$	17,289	0.38		5,652,891		$	19,993	0.47
Non-interest bearing deposits	2,677,865						2,194,648
Other non-interest bearing liabilities	227,333						193,203
Stockholders’ equity	1,452,183						1,291,988
Total liabilities and stockholders’ equity	$	10,393,719					$	9,332,730
Net interest income/interest rate spread (5)			$	248,357	3.54	%			$	221,127	3.48	%
Less: taxable equivalent adjustment			17,345						17,054
Net interest income, as reported			$	231,012					$	204,073
Net interest margin (6)					3.41	%					3.34	%
Tax equivalent effect					0.25	%					0.28	%
Net interest margin on a fully tax equivalent basis (6)					3.66	%					3.62	%

(1) Non-accrual loans are included in average loans.

(2) Interest income includes amortization of net deferred loan origination fees and costs.

(3) Loans held for sale are included in the average loan balance listed. Related interest income is included in loan interest income.

(4) Non-taxable loan and investment income is presented on a fully tax equivalent basis assuming a 35% tax rate.

(6) Net interest margin represents net interest income as a percentage of average interest earning assets.

Net interest income on a fully tax equivalent basis increased $27.2 million during the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The net interest margin, expressed on a fully tax equivalent basis, was 3.66% for the nine months ended September 30, 2014 and 3.62% for the nine months ended September 30, 2013.

As noted above, on August 18, 2014, we completed the Taylor Capital merger. The acquired assets and assumed liabilities were recorded at fair value as required under the acquisition method of accounting. Fair value adjustments are amortized or accreted into net interest income over the remaining terms of the interest earning assets and interest bearing liabilities. The fair value adjustment on acquired loans had the most significant impact on net interest margin. Net interest income in the third quarter of 2014 included interest income of $6.2 million resulting from the accretion of the purchase accounting discount recorded on the loans acquired in the Taylor Capital merger. Excluding the purchase accounting loan discount accretion on Taylor Capital loans, our net interest margin on a fully tax equivalent basis would have been 3.54% and 3.57% for the three and nine months ended September 30, 2014, respectively, compared to 3.66% and 3.62% for the three and nine months ended September 30, 2013.

Non-interest Income



	Three Months Ended
	September 30,
	2014			2013		Increase/ (Decrease)			Percentage Change
Non-interest income (in thousands):
Lease financing, net	$	17,719		$	14,070	$	3,649		25.9	%
Mortgage banking revenue	16,823			177		16,646			NM
Commercial deposit and treasury management fees	9,345			6,327		3,018			47.7
Trust and asset management fees	5,712			4,799		913			19.0
Card fees	3,836			2,745		1,091			39.7
Capital markets and international banking fees	1,472			972		500			51.4
Consumer and other deposit service fees	3,362			3,648		(286		)	(7.8	)
Brokerage fees	1,145			1,289		(144		)	(11.2	)
Loan service fees	1,069			1,427		(358		)	(25.1	)
Increase in cash surrender value of life insurance	855			851		4			0.5
Net (loss) gain on investment securities	(3,246		)	1		(3,247		)	NM
Net loss on sale of assets	(7		)	—		(7		)	NM
Gain on early extinguishment of debt	1,895			—		1,895			NM
Other operating income	1,107			1,401		(294		)	(21.0	)
Total non-interest income	$	61,087		$	37,707	$	23,380		62.0	%

NM - not meaningful

Non-interest income increased by $23.4 million, or 62.0%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013.


•	Mortgage banking revenue increased due to the acquisition of Taylor Capital's mortgage operations through the merger.


•	Leasing revenues increased due to higher fees and promotional revenue from the sale of third-party equipment maintenance contracts. The Company acquired another leasing subsidiary, Cole Taylor Equipment Finance, through the Taylor Capital merger. Cole Taylor Equipment Finance contributed approximately $404 thousand to leasing revenues in the third quarter of 2014 since the date of acquisition.


•	Commercial deposit and treasury management fees increased due to the increased customer base as a result of the Taylor Capital merger and new customer activity prior to the merger.


•	Card fees increased due to the full quarter impact of a new payroll prepaid card program that started in the second quarter of 2014.


•	Trust and asset management fees increased due to the addition of new customers and the impact of higher equity values.


•	A gain on the early extinguishment of debt and net loss on investment securities were recognized in the third quarter of 2014 as a result of the balance sheet repositioning that occurred in September 2014, as noted earlier.



	Nine Months Ended
	September 30,
	2014			2013		Increase/ (Decrease)			Percentage Change
Non-interest income (in thousands):
Lease financing, net	$	45,768		$	45,435	$	333		0.7	%
Mortgage banking revenue	17,069			1,322		15,747			NM
Commercial deposit and treasury management fees	23,595			18,322		5,273			28.8
Trust and asset management fees	16,324			14,167		2,157			15.2
Card fees	9,841			8,175		1,666			20.4
Capital markets and international banking fees	3,810			2,719		1,091			40.1
Consumer and other deposit service fees	9,453			10,487		(1,034		)	(9.9	)
Brokerage fees	3,826			3,680		146			4.0
Loan service fees	2,950			4,349		(1,399		)	(32.2	)
Increase in cash surrender value of life insurance	2,516			2,537		(21		)	(0.8	)
Net (loss) gain on investment securities	(3,016		)	14		(3,030		)	NM
Net loss on sale of assets	(24		)	—		(24		)	NM
Gain on early extinguishment of debt	1,895			—		1,895			NM
Other operating income	3,620			4,142		(522		)	(12.6	)
Total non-interest income	$	137,627		$	115,349	$	22,278		19.3	%

NM - not meaningful

Non-interest income increased by $22.3 million, or 19.3%, for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013.


•	Mortgage banking revenue increased due to the acquisition of Taylor Capital's mortgage operations through the merger.


•	Commercial deposit and treasury management fees increased due to robust new customer activity as well as the increased customer base as a result of the Taylor Capital merger.


•	Trust and asset management fees increased due to the addition of new customers and the impact of higher equity values.


•	Card fees increased due to a new payroll prepaid card program as well as higher credit card fees.


•	Capital markets and international banking services fees increased due to higher M&A advisory and syndication fees.


•	Loan service fees decreased due to lower late, prepayment and miscellaneous loan fees collected.


•	Consumer and other deposit service fees decreased due to lower demand deposit service and NSF and overdraft charges.


•	A gain on the early extinguishment of debt and net loss on investment securities were recognized in the third quarter of 2014 as a result of the balance sheet repositioning that occurred in September 2014, as noted earlier.

Non-interest Expenses



	Three Months Ended
	September 30,
	2014		2013		Increase/ (Decrease)			Percentage Change
Non-interest expenses (in thousands):
Salaries and employee benefits	$	79,492	$	44,918	$	34,574		77.0	%
Occupancy and equipment expense	11,742		8,797		2,945			33.5
Computer services and telecommunication expense	11,506		4,870		6,636			136.3
Advertising and marketing expense	2,235		1,917		318			16.6
Professional and legal expense	8,864		3,102		5,762			185.8
Other intangibles amortization expense	1,470		1,513		(43		)	(2.8	)
Net loss recognized on other real estate owned	1,769		791		978			123.6
Other real estate expense, net	409		240		169			70.4
Other operating expenses	24,714		10,117		14,597			144.3
Total non-interest expenses	$	142,201	$	76,265	$	65,936		86.5	%

Non-interest expenses increased by $65.9 million, or 86.5%, for the three months ended September 30, 2014 from the three months ended September 30, 2013. Non-interest expenses include $27.2 million in expenses related to the merger with Taylor Capital.

The following table presents the detail of the merger related expenses (dollars in thousands):



	Three Months Ended
	September 30,
	2014
Merger related expenses:
Salaries and employee benefits	$	14,259
Occupancy and equipment expense	428
Computer services and telecommunication expense	5,312
Advertising and marketing expense	262
Professional and legal expense	6,363
Other operating expenses	537
Total merger related expenses	$	27,161

Other explanations for changes are as follows:


•	Salaries and employee benefits increased due to annual salary increases, long-term incentive expense, taxes and temporary staffing needs and the increased staff from the Taylor Capital merger.


•	Other operating expense increased primarily as a result of the $10.6 million contingent consideration expense related to our acquisition of Celtic Leasing Corp., an increase in filing and other loan expense as well as higher FDIC assessments due to our larger balance sheet and higher currency delivery expenses related to new treasury management accounts.


•	Computer services and telecommunication expenses increased due primarily to an increase in spending on IT security, data warehouse, investments in our key fee initiatives, as well as higher transaction volumes in the leasing, treasury management and card areas. The increase was also due to increased telecommunication expense related to transitioning to a new provider.


•	Occupancy and equipment expense increased due to the additional offices acquired in the Taylor Capital merger.



	Nine Months Ended
	September 30,
	2014		2013			Increase/ (Decrease)			Percentage Change
Non-interest expenses (in thousands):
Salaries and employee benefits	$	170,491	$	132,341		$	38,150		28.8	%
Occupancy and equipment expense	30,852		27,609			3,243			11.7
Computer services and telecommunication expense	21,669		13,374			8,295			62.0
Advertising and marketing expense	6,537		6,187			350			5.7
Professional and legal expense	12,210		5,750			6,460			112.3
Other intangibles amortization expense	3,884		4,595			(711		)	(15.5	)
Net loss (gain) recognized on other real estate owned	2,147		(894		)	3,041			(340.2	)
Other real estate expense, net	1,142		572			570			99.7
Other operating expenses	47,346		28,413			18,933			66.6
Total non-interest expenses	$	296,278	$	217,947		$	78,331		35.9	%

Non-interest expenses increased by $78.3 million, or 35.9%, for the nine months ended September 30, 2014 from the nine months ended September 30, 2013. Non-interest expenses include $28.3 million in expenses related to the merger with Taylor Capital.

The following table presents the detail of the merger related expenses (dollars in thousands):



	Nine Months Ended
	September 30,
	2014
Merger related expenses:
Salaries and employee benefits	$	14,363
Occupancy and equipment expense	442
Computer services and telecommunication expense	5,495
Advertising and marketing expense	460
Professional and legal expense	6,852
Other operating expenses	717
Total merger related expenses	$	28,329

We expect to incur additional merger related expenses in the next few quarters primarily in the area of occupancy and equipment expense.

Other explanations for changes are as follows:


•	Salaries and employee benefits increased due to annual salary increases, long-term incentive expense, health insurance and temporary staffing needs and the increased staff from the Taylor Capital merger.


•	Other operating expense increased primarily as a result of an increase in filing and other loan expense, higher FDIC assessments due to our larger balance sheet and higher currency delivery expenses related to new treasury management accounts and the $10.6 million contingent consideration expense related to our acquisition of Celtic Leasing Corp.


•	Computer services and telecommunication expenses increased due primarily to an increase in spending on IT security, data warehouse, investments in our key fee initiatives, as well as higher transaction volumes in the leasing, treasury management and card areas. The increase was also due to increased telecommunication expense related to transitioning to a new provider.

Income Taxes

Income tax expense for the nine months ended September 30, 2014 was $20.1 million compared to $29.7 million for the nine months ended September 30, 2013. The decrease was primarily due to a decrease in our pre-tax income during the nine months ended September 30, 2014, partially offset by certain costs incurred in 2014 that were not deductible for tax purposes. These include the contingent consideration expense related to the Celtic acquisition and certain legal and professional fees associated with the Taylor Capital merger.

Balance Sheet

Total assets increased $4.9 billion, or 50.5%, from $9.6 billion at December 31, 2013 to $14.5 billion at September 30, 2014 primarily due to the assets acquired through the Taylor Capital merger.


•	Cash and cash equivalents decreased $26.7 million, or 5.6% from $473.5 million at December 31, 2013 to $446.8 million at September 30, 2014 primarily due to the repayment of short term borrowings.


•	Investment securities increased $486.7 million, or 20.7%, from December 31, 2013 to September 30, 2014 mostly as a result of the investment securities acquired through the Taylor Capital merger partly offset by the $451.6 million sale of certain investment securities as part of the balance sheet repositioning in September 2014.


•	Gross loans, excluding purchased credit-impaired including covered loans, increased by $3.2 billion to $8.7 billion at September 30, 2014 from December 31, 2013 primarily due to the loans acquired through the Taylor Capital merger.

Total liabilities increased by $4.2 billion, or 50.5%, from $8.3 billion at December 31, 2013 to $12.5 billion at September 30, 2014 primarily due to the liabilities assumed through the Taylor Capital merger.


•	Total deposits increased by $3.9 billion, or 52.3%, to $11.2 billion at September 30, 2014 from December 31, 2013 primarily due to the deposits assumed through the Taylor Capital merger.


•	Noninterest bearing deposits increased by 67.8% and 60.3% compared to September 30, 2013 and December 31, 2013, respectively, primarily due to the noninterest bearing deposits acquired through Taylor Capital Merger.


•	Total borrowings increased by $222.5 million, or 31.4%, to $930.1 million at September 30, 2014. The increase in total borrowings was primarily due to the borrowings assumed in the Taylor Capital merger partly offset by the repayment of short term FHLB advance and junior subordinated notes as part of the balance sheet repositioning in September 2014.

Total stockholders’ equity increased $664.7 million to $2.0 billion at September 30, 2014 compared to December 31, 2013 primarily as a result of the equity issued in the connection with the Taylor Capital merger.

Investment Securities

The following table sets forth the amortized cost and fair value of our investment securities, by type of security as indicated (in thousands):



	September 30, 2014				December 31, 2013				September 30, 2013
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale
U.S. Government sponsored agencies and enterprises	$	64,809	$	65,829	$	50,486	$	52,068	$	50,678	$	52,527
States and political subdivisions	391,900		409,033		19,398		19,143		19,461		19,312
Residential mortgage-backed securities	795,554		801,940		696,415		701,233		685,126		691,276
Commercial mortgage-backed securities	204,076		204,162		50,891		52,941		50,944		53,446
Corporate bonds	265,720		267,239		284,083		283,070		265,293		263,021
Equity securities	10,470		10,447		10,649		10,457		10,574		10,541
Total Available for Sale	1,732,529		1,758,650		1,111,922		1,118,912		1,082,076		1,090,123
Held to maturity
States and political subdivisions	760,674		788,097		932,955		936,173		941,273		946,309
Residential mortgage-backed securities	244,675		257,420		249,578		262,756		252,271		266,439
Total Held to Maturity	1,005,349		1,045,517		1,182,533		1,198,929		1,193,544		1,212,748
Total	$	2,737,878	$	2,804,167	$	2,294,455	$	2,317,841	$	2,275,620	$	2,302,871

Loan Portfolio

The following table sets forth the composition of our loan portfolio (excluding loans held for sale) as of the dates indicated (dollars in thousands):



	September 30, 2014				December 31, 2013				September 30, 2013
	Amount		% of Total		Amount		% of Total		Amount		% of Total
Commercial related credits:
Commercial loans	$	3,078,590	34	%	$	1,281,377	22	%	$	1,169,009	21	%
Commercial loans collateralized by assignment of lease payments	1,631,660		18		1,494,188		26		1,468,814		26
Commercial real estate	2,646,895		30		1,647,700		29		1,638,368		29
Construction real estate	230,999		3		141,253		3		136,146		2
Total commercial related credits	7,588,144		85		4,564,518		80		4,412,337		78
Other loans:
Residential real estate	516,873		5		314,440		5		311,256		6
Indirect vehicle	273,038		3		262,632		5		257,740		5
Home equity	262,977		3		268,289		5		274,484		5
Other consumer loans	69,028		1		66,952		1		57,418		1
Total other loans	1,121,916		12		912,313		16		900,898		17
Gross loans excluding purchased credit-impaired and covered loans	8,710,060		97		5,476,831		96		5,313,235		95
Purchased credit-impaired including covered loans ⁽¹⁾	272,957		3		235,720		4		273,497		5
Total loans	$	8,983,017	100	%	$	5,712,551	100	%	$	5,586,732	100	%


⁽¹⁾	Covered loans refer to loans we acquired in FDIC-assisted transactions that have been subject to loss-sharing agreements with the FDIC.

Gross loans, excluding purchased credit-impaired and covered loans, increased by $3.2 billion to $8.7 billion at September 30, 2014 from December 31, 2013. Gross loans increased by $3.3 billion to $9.0 billion at September 30, 2014 from $5.7 billion at December 31, 2013. This increase was primarily due to the Taylor Capital merger.

Asset Quality

Non-performing loans include loans accounted for on a non-accrual basis and accruing loans contractually past due 90 days or more as to interest or principal. Management reviews the loan portfolio for problem loans on an ongoing basis. During the ordinary course of business, management becomes aware of borrowers that may not be able to meet the contractual requirements of loan agreements. These loans are placed under close supervision with consideration given to placing the loan on non-accrual status, increasing the allowance for loan losses and (if appropriate) partial or full charge-off. After a loan is placed on non-accrual status, any interest previously accrued but not yet collected is reversed against current income. Generally, if interest payments are received on non-accrual loans, these payments will be applied to principal and not taken into income. Loans will not be placed back on accrual status unless back interest and principal payments are made. Our general policy is to place loans 90 days past due on non-accrual status, as well as those loans that continue to pay, but display a well-defined material weakness.

Non-performing loans exclude loans held for sale and purchased credit-impaired loans. Fair value of these loans as of acquisition includes estimates of credit losses. See Note 6 of the notes to our consolidated financial statements for further information regarding purchased credit-impaired loans.

The following table sets forth the amounts of non-performing loans and non-performing assets at the dates indicated (dollars in thousands):




	September 30, 2014			December 31, 2013			September 30, 2013
Non-performing loans:
Non-accruing loans	$	97,580		$	106,115		$	102,042
Loans 90 days or more past due, still accruing interest	2,681			446			410
Total non-performing loans	100,261			106,561			102,452
Other real estate owned	19,179			23,289			31,356
Repossessed assets	126			840			861
Total non-performing assets	$	119,566		$	130,690		$	134,669
Total allowance for loan losses	$	102,810		$	111,746		$	118,031
Accruing restructured loans ⁽¹⁾	16,877			29,430			29,911
Total non-performing loans to total loans	1.12		%	1.87		%	1.83		%
Total non-performing assets to total assets	0.82			1.36			1.45
Allowance for loan losses to non-performing loans	102.54			104.87			115.21


⁽¹⁾	Accruing restructured loans consists primarily of residential real estate and home equity loans that have been modified and are performing in accordance with those modified terms.

A loan is classified as a troubled debt restructuring when a borrower is experiencing financial difficulties that leads to a restructuring of the loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. These concessions may include rate reductions, principal forgiveness, extension of maturity date and other actions intended to minimize potential losses. A loan that is modified at a market rate of interest may no longer be classified as troubled debt restructuring in the calendar year subsequent to the restructuring if it is in compliance with the modified terms. Payment performance prior and subsequent to the restructuring is taken into account in assessing whether it is likely that the borrower can meet the new terms. This may result in the loan being returned to accrual at the time of restructuring. A period of sustained repayment for at least six months generally is required for return to accrual status.

Occasionally, the Company will restructure a note into two separate notes (A/B structure), charging off the entire B portion of the note. The A note is structured with appropriate loan-to-value and cash flow coverage ratios that provide for a high likelihood of repayment. The A note is classified as a non-performing note until the borrower has displayed a historical payment performance for a reasonable time prior to and subsequent to the restructuring. A period of sustained repayment for at least six months generally is required to return the note to accrual status provided that management has determined that the performance is reasonably expected to continue. The A note will be classified as a restructured note (either performing or non-performing) through the calendar year of the restructuring that the historical payment performance has been established.

Non-performing assets consist of non-performing loans as well as other repossessed assets and other real estate owned. Other real estate owned represents properties acquired through foreclosure or other proceedings and is recorded at fair value less the estimated cost of disposal at the date of acquisition. Other real estate owned is evaluated regularly to ensure that the recorded amount is supported by its current fair value. Valuation allowances to reduce the carrying amount to fair value less estimated costs of disposal are recorded as necessary. Gains and losses and changes in valuations on other real estate owned are included in net gain (loss) recognized on other real estate within non-interest expense. Expenses, net of rental income, from the operations of other real estate owned are reflected as a separate line item on the income statement. Other repossessed assets primarily consist of repossessed vehicles. Losses on repossessed vehicles are charged-off to the allowance when title is taken and the vehicle is valued. Once MB Financial Bank obtains title, repossessed vehicles are not included in loans, but are classified as “other assets” on the consolidated balance sheets. The typical holding period for resale of repossessed automobiles is less than 90 days unless significant repairs to the vehicle are needed which occasionally results in a longer holding period. The typical holding period for motorcycles can be more than 90 days, as the average motorcycle re-sale period is longer than the average automobile re-sale period. The longer average period for motorcycles is a result of cyclical trends in the motorcycle market.

Other real estate owned that is related to our FDIC-assisted transactions is excluded from non-performing assets. Other real estate owned related to the Heritage, Benchmark, Broadway, and New Century FDIC-assisted transactions totaled $19.5 million and $19.6 million at September 30, 2014 and December 31, 2013, respectively, much of which is subject to the loss-share agreements with the FDIC. See Note 6 of the notes to our consolidated financial statements for further information.

The following table presents a summary of other real estate owned, excluding assets related to FDIC-assisted transactions, for the nine months ended September 30, 2014 and 2013 (in thousands):



	September 30,
	2014			2013
Beginning balance	$	23,289		$	36,977
Transfers in at fair value less estimated costs to sell	872			6,060
Acquired from business combination	5,082			—
Capitalized other real estate owned costs	—			53
Fair value adjustments	(2,509		)	80
Net gains on sales of other real estate owned	835			977
Cash received upon disposition	(8,390		)	(12,791		)
Ending balance	$	19,179		$	31,356

Potential Problem Loans

We define potential problem loans as performing loans rated substandard and that do not meet the definition of a non-performing loan (See “Asset Quality” section above for non-performing loans). We do not necessarily expect to realize losses on potential problem loans, but we recognize potential problem loans carry a higher probability of default and require additional attention by management. The following table sets forth the aggregate principal amount of potential problem loans, excluding purchased credit-impaired loans, at the dates indicated (in thousands):



	September 30, 2014		December 31, 2013

Commercial loans	$	23,898	$	43,844
Commercial loans collateralized by assignment of lease payments	2,412		2,459
Commercial real estate	25,380		32,895
Construction real estate	—		391
Total	$	51,690	$	79,589

Allowance for Loan Losses

Management believes the allowance for loan losses accounting policy is critical to the portrayal and understanding of our financial condition and results of operations. Selection and application of this “critical accounting policy” involves judgments, estimates, and uncertainties that are subject to change. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, materially different financial condition or results of operations is a reasonable possibility.

We maintain our allowance for loan losses at a level that management believes is appropriate to absorb probable losses on existing loans based on an evaluation of the collectability of loans, underlying collateral and prior loss experience.

Our allowance for loan losses is comprised of three elements: a commercial related general loss reserve; a commercial related specific reserve for impaired loans; and a consumer related reserve for smaller-balance homogenous loans. Each element is discussed below.

Commercial Related General Loss Reserve. We maintain a general loan loss reserve for the four categories of commercial-related loans in our portfolio: commercial loans, commercial loans collateralized by the assignment of lease payments (lease loans), commercial real estate loans and construction real estate loans.

Under our loan risk rating system, each loan, with the exception of those included in large groups of smaller-balance homogeneous consumer related loans, is risk rated between one and nine by the originating loan officer, Senior Credit Management, Loan Review or any loan committee. Loans rated "one" represent those loans least likely to default and a loan rated "nine" represents a loss. The probability of loans defaulting for each risk rating, sometimes referred to as default factors, are estimated based on the frequency with which loans migrate from one risk rating to another and to default status over time. We use a loan loss reserve model that incorporates the migration of loan risk ratings and historical default data over a multi-year period to develop our estimated default factors (EDFs). The model tracks annual loan rating migrations by loan type and currently uses loan risk rating migrations for 13 years. The migration data is adjusted by using average losses for an economic cycle (approximately 12 years) to develop EDFs by loan type, risk rating and maturity. EDFs are updated annually in December.

Estimated loan default factors are multiplied by individual loan balances in each risk-rating category and again multiplied by an historical loss given default estimate for each loan type (which incorporates estimated recoveries) to determine the appropriate allowance by loan type. This approach is applied to the commercial, lease, commercial real estate, and construction real estate components of the portfolio.

To account for current economic conditions, the general allowance for loan and lease losses (ALLL) also includes adjustments for macroeconomic factors. Macroeconomic factors adjust the ALLL upward or downward based on the current point in the economic cycle using predictive economic data and are applied to the loan loss model through a separate allowance element for the commercial, commercial real estate, construction real estate and lease loan components. To determine our macroeconomic factors, we use specific economic data that has shown to be a statistically reliable predictor of our credit losses relative to our long term average credit losses. We tested over 20 economic variables (U.S. manufacturing index, unemployment rate, U.S. GDP growth, etc.). We annually review this data to determine that such a relationship continues to exist. We currently use the following macroeconomic indicators in our macroeconomic factor computation:

Commercial loans and lease loans: Japanese bilateral dollar exchange, our prior period charge-off rates and the consumer confidence index.

Commercial real estate loans and construction loans: Prime rate, our prior period charge-off rates and the annual change in the U.S. commercial real estate index.

Using the indicators noted above, a predicted charge-off percentage is calculated. The predicted charge-off percentage is then compared to the cycle average charge-off percentage used in our EDF computation discussed above, and a macroeconomic adjustment factor is calculated. The macroeconomic adjustment factor is applied to each commercial loan type. Each year, we review the predictive nature of the macroeconomic factors by comparing actual charge-offs to the predicted model charge-offs, re-run our regression analysis and re-calibrate the macroeconomic factors as appropriate.

The commercial related general loss reserve was $76.6 million as of September 30, 2014 and $78.3 million as of December 31, 2013. The decrease in the general reserve related primarily to an improvement in risk ratings. Reserves on impaired commercial related loans are included in the “Commercial Related Specific Reserves” section below.

Commercial Related Specific Reserves. Our allowance for loan losses also includes specific reserves on impaired commercial loans. A loan is considered to be impaired when management believes, after considering collection efforts and other factors, the borrower's financial condition is such that the collection of all contractual principal and interest payments due is doubtful.

At each quarter-end, impaired commercial loans are reviewed individually, with adjustments made to the general calculated reserve for each loan as deemed necessary. Specific adjustments are made depending on expected cash flows and/or the value of the collateral securing each loan. Generally, the Company obtains a current external appraisal (within 12 months) on real estate secured impaired loans. Our appraisal policy is designed to comply with the Interagency Appraisal and Evaluation Guidelines, most recently updated in December 2010. As part of our compliance with these guidelines, we maintain an internal Appraisal Review Department that engages and reviews all third party appraisals.

In addition, each impaired commercial loan with real estate collateral is reviewed quarterly by our appraisal department to determine that the most recent valuation remains appropriate during subsequent quarters until the next appraisal is received. If considered necessary by our appraisal department, the appraised value may be further discounted by internally applying accepted appraisal methodologies to an older appraisal. Accepted appraisal methodologies include: income capitalization approach adjusting for changes in underlying leases, adjustments related to condominium projects with units sales, adjustments for loan fundings, and “As is” compared to “As Stabilized” valuations.

Other valuation techniques are also used to value non-real estate assets. Discounts may be applied in the impairment analysis used for general business assets (GBA). Examples of GBA include accounts receivable, inventory, and any marketable securities pledged. The discount is used to reflect collection risk in the event of default that may not have been included in the valuation of the asset.

The total commercial related specific reserves component of the allowance decreased from $12.8 million as of December 31, 2013 to $5.8 million as of September 30, 2014 due primarily to an improvement in credit quality on impaired loans and in part to loans charged off.

Consumer Related Reserves. Pools of homogenous loans with similar risk and loss characteristics are also assessed for probable losses. These loan pools include consumer, residential real estate, home equity, credit cards and indirect vehicle loans. Migration probabilities obtained from past due roll rate analyses and historical loss rates are applied to current balances to forecast charge-offs over a one-year time horizon. The reserves for consumer related loans totaled $20.4 million at September 30, 2014 and $20.6 million at December 31, 2013.

We consistently apply our methodology for determining the appropriateness of the allowance for loan losses but may adjust our methodologies and assumptions based on historical information related to charge-offs and management's evaluation of the loan portfolio. In this regard, we periodically review the following to validate our allowance for loan losses: historical net charge-offs as they relate to prior periods' allowance for loan loss, comparison of historical loan migration in past years compared to the current year, overall credit trends and ratios and any significant changes in loan concentrations. In reviewing this data, we adjust qualitative factors within our allowance methodology to appropriately reflect any changes warranted by the validation process. Management believes it has established an allowance for probable loan losses as appropriate under GAAP.

The following table presents an analysis of the allowance for loan losses for the periods presented (dollars in thousands):



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2014			2013			2014			2013
Balance at beginning of period	$	103,905		$	125,497		$	113,462		$	128,279
Allowance for unfunded credit commitments acquired through business combination	1,261			—			1,261			—
Utilization of allowance for unfunded credit commitments	(637		)	—			(637		)	—
Provision for credit losses	3,109			(3,304		)	2,309			(2,804		)
Charge-offs:
Commercial loans	606			1,686			1,142			3,030
Commercial loans collateralized by assignment of lease payments	—			—			40			—
Commercial real estate	1,027			1,236			9,910			5,131
Construction real estate	5			26			75			855
Residential real estate	740			713			1,438			2,074
Home equity	566			437			2,002			2,547
Indirect vehicles	1,043			572			2,546			1,930
Other consumer loans	497			485			1,582			1,501
Total charge-offs	4,484			5,155			18,735			17,068
Recoveries:
Commercial loans	564			579			2,888			1,808
Commercial loans collateralized by assignment of lease payments	425			—			555			1,131
Commercial real estate	2,227			966			3,279			5,353
Construction real estate	25			420			201			827
Residential real estate	4			48			529			461
Home equity	46			228			306			442
Indirect vehicles	402			372			1,283			1,111
Other consumer loans	65			74			211			185
Total recoveries	3,758			2,687			9,252			11,318
Net charge-offs	726			2,468			9,483			5,750
Allowance for credit losses	106,912			119,725			106,912			119,725
Allowance for unfunded credit commitments	(4,102		)	(1,694		)	(4,102		)	(1,694		)
Allowance for loan losses	$	102,810		$	118,031		$	102,810		$	118,031
Total loans	$	8,983,017		$	5,586,732		$	8,983,017		$	5,586,732
Ratio of allowance to total loans	1.14		%	2.11		%	1.14		%	2.11		%
Ratio of net charge-offs to average loans	0.04			0.18			0.21			0.14

Net charge-offs of $9.5 million were recorded in the nine months ended September 30, 2014 compared to net charge-offs of $5.8 million in the nine months ended September 30, 2013. A provision for credit losses of $2.3 million was recorded for the nine months ended September 30, 2014 compared to a negative provision for credit losses of $2.8 million for the nine months ended September 30, 2013.

The provision for credit losses for the nine months ended September 30, 2014 included a negative provision for credit losses of $2.4 million for the legacy MB Financial portfolio and a positive provision of $4.7 million related to the acquired Taylor Capital portfolio for loan renewals subsequent to the acquisition date and the establishment of a corresponding general reserve for Taylor Capital loans in excess of the loan discount. We anticipate recording a provision related to the acquired portfolio in future quarters related to renewing Taylor loans which will largely offset the accretion from non-purchase credit-impaired loans.

Additions to the allowance for loan losses, which are charged to earnings through the provision for credit losses, are determined based on a variety of factors, including specific reserves, current loan risk ratings, delinquent loans, historical loss experience and economic conditions in our market area. In addition, federal regulatory authorities, as part of the examination process, periodically review our allowance for loan losses. The regulators may require us to record adjustments to the allowance level based upon their assessment of the information available to them at the time of examination. Although management believes the allowance for loan losses is sufficient to cover probable losses inherent in the loan portfolio, there can be no assurance that the allowance will prove sufficient to cover actual loan losses.

We utilize an internal asset classification system as a means of reporting problem and potential problem assets. At scheduled meetings of the board of directors of MB Financial Bank, a watch list is presented, showing significant loan relationships listed as “Special Mention,” “Substandard,” and “Doubtful.” An asset is classified Substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as Loss are those considered uncollectible and viewed as valueless assets and have been charged-off. Assets that do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management's close attention are deemed to be Special Mention.

Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the Office of the Comptroller of the Currency, MB Financial Bank's primary regulator, which can order the establishment of additional general or specific loss allowances. There can be no assurance that regulators, in reviewing our loan portfolio, will not request us to materially adjust our allowance for loan losses. The Office of the Comptroller of the Currency, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that (1) institutions have effective systems and controls to identify, monitor and address asset quality problems; (2) management has analyzed all significant factors that affect the collectability of the portfolio in a reasonable manner; and (3) management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. We analyze our process regularly, with modifications made if needed, and report those results four times per year at meetings of our board of directors. However, there can be no assurance that regulators, in reviewing our loan portfolio, will not request us to materially adjust our allowance for loan losses at the time of their examination.

Although management believes that appropriate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary.

Lease Investments

The lease portfolio is comprised of various types of equipment, generally technology related, including computer systems and satellite equipment, material handling and general manufacturing equipment.

Lease investments by categories follow (in thousands):



	September 30, 2014			December 31, 2013			September 30, 2013
Direct finance leases:
Minimum lease payments	$	312,507		$	155,945		$	140,162
Estimated unguaranteed residual values	62,628			31,272			31,515
Less: unearned income	(29,448		)	(14,473		)	(14,607		)
Direct finance leases ⁽¹⁾	$	345,687		$	172,744		$	157,070
Leveraged leases:
Minimum lease payments	$	13,549		$	24,320		$	23,232
Estimated unguaranteed residual values	1,712			2,508			2,573
Less: unearned income	(734		)	(1,644		)	(1,644		)
Less: related non-recourse debt	(13,064		)	(23,243		)	(22,174		)
Leveraged leases ⁽¹⁾	$	1,463		$	1,941		$	1,987
Operating leases:
Equipment, at cost	$	231,529		$	218,473		$	202,879
Less accumulated depreciation	(94,409		)	(87,384		)	(90,388		)
Lease investments, net	$	137,120		$	131,089		$	112,491


⁽¹⁾	Direct finance and leveraged leases are included as commercial loans collateralized by assignment of lease payments for financial statement purposes.

Leases that transfer substantially all of the benefits and risk related to the equipment ownership are classified as direct finance leases. If these direct finance leases have non-recourse debt associated with them and meet the additional requirements for a leveraged lease, they are further classified as leverage leases, and the associated debt is netted with the outstanding balance in the consolidated financial statements. Interest income on direct finance and leveraged leases is recognized using methods which approximate a level yield over the term of the lease. Operating leases are investments in equipment leased to other companies, where the residual component makes up more than 10% of the investment. The Company funds most of the lease equipment purchases internally, but has some loans at other banks which totaled $32.8 million at September 30, 2014, $17.5 million at December 31, 2013 and $17.7 million at September 30, 2013.

At September 30, 2014, the following reflects the residual values for leases by category in the year the initial lease term ends (in thousands):



	Residual Values
	Direct
End of initial lease term	Finance		Leveraged		Operating
December 31,	Leases		Leases		Leases		Total
2014	$	4,637	$	28	$	6,374	$	11,039
2015	8,694		954		8,259		17,907
2016	7,875		606		10,276		18,757
2017	14,743		105		9,105		23,953
2018	10,053		19		6,663		16,735
Thereafter	16,626		—		9,769		26,395
	$	62,628	$	1,712	$	50,446	$	114,786

The lease residual value represents the present value of the estimated fair value of the leased equipment at the termination of the lease. Lease residual values are generally reviewed quarterly, and any write-downs or charge-offs deemed necessary are recorded in the period in which they become known. To mitigate this risk of loss, we usually limit individual leased equipment residuals to approximately $1 million per transaction and seek to diversify both the type of equipment leased and the industries in which the lessees participate. Often times, there are several individual lease schedules under one master lease. There were 3,785 leases at September 30, 2014 compared to 3,590 at December 31, 2013. The average residual value per lease schedule was approximately $30 thousand at September 30, 2014 and $21 thousand at December 31, 2013. The average residual value per master lease schedule was approximately $125 thousand at September 30, 2014 and $82 thousand at December 31, 2013, respectively.

Liquidity and Sources of Capital

Our cash flows are composed of three classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

Cash flows from operating activities primarily include net income, adjusted for items in net income that did not impact cash. Net cash flows provided by operating activities were $281.7 million for the nine months ended September 30, 2014 compared to net cash flows provided by operating activities of $126.3 million for the nine months ended September 30, 2013. The change is primarily due to the increase in sales of loans held for sale as a result of the acquisition of Taylor Capital's mortgage operations through the merger.

Cash used in investing activities reflects the impact of loans and investment securities acquired for the Company’s interest-earning asset portfolios, as well as cash flows from asset sales and the impact of acquisitions. For the nine months ended September 30, 2014, the Company had net cash flows provided by investing activities of $705.1 million compared to net cash flows provided by investing activities of $139.0 million for the nine months ended September 30, 2013. The change was primarily due to proceeds from sales of investment securities related to the balance sheet repositioning in September 2014 as well as the decrease in covered loans.

Cash flows from financing activities include transactions and events whereby cash is obtained from depositors, creditors or investors. For the nine months ended September 30, 2014, the Company had net cash flows used in financing activities of $1.0 billion compared to net cash flows used in financing activities of $296.2 million for the nine months ended September 30, 2013. The change in cash flows from financing activities was primarily due to the decrease in short-term borrowings as a result of the balance sheet repositioning in September 2014.

In the event that additional short-term liquidity is needed, we have established relationships with several large and regional banks to provide short-term borrowings in the form of federal funds purchases. While, at September 30, 2014, there were no firm lending commitments in place, management believes that we could borrow approximately $280 million for a short time from these banks on a collective basis. Additionally, we are a member of Federal Home Loan Bank of Chicago ("FHLB"). As of September 30, 2014, the Company had $354.2 million outstanding in FHLB advances, and could borrow an additional amount of approximately $798.5 million. As a contingency plan for significant funding needs, the Asset/Liability Committee may also consider the sale of investment securities, selling securities under agreement to repurchase, or the temporary curtailment of lending activities. As of

September 30, 2014, the Company had approximately $1.7 billion of unpledged securities, excluding securities available for pledge at the FHLB.

Our main sources of liquidity at the holding company level are dividends from MB Financial Bank and cash on hand. In addition, the Company has a $35.0 million unsecured line of credit with a correspondent bank. As of September 30, 2014, $15.0 million was outstanding. The holding company had $33.4 million in cash as of September 30, 2014.

See Notes 9 and 10 of the Financial Statements presented under Item 1 of this report for details of period end balances and other information for these various funding sources. There were no material changes outside the ordinary course of business in the Company’s contractual obligations at September 30, 2014 as compared to December 31, 2013.

MB Financial Bank is subject to various regulatory capital requirements which affect its ability to pay dividends to us. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Additionally, our current internal policy effectively limits the amount of dividends our subsidiary bank may pay to us by requiring the bank to maintain total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage capital ratios of 12.00%, 9.00% and 8.00%, respectively. The minimum ratios required for a bank to be considered “well capitalized” for regulatory purposes are 10.00%, 6.00% and 5.00%, respectively. In addition to adhering to our policy, there are regulatory restrictions on the ability of national banks to pay dividends. See “Item 1. Business — Supervision and Regulation” in our Annual Report on Form 10-K for the year ended December 31, 2013.

At September 30, 2014, the Company’s total risk-based capital ratio was 13.58%, Tier 1 capital to risk-weighted assets ratio was 12.62% and Tier 1 capital to average asset ratio was 12.27%. MB Financial Bank’s total risk-based capital ratio was 13.13%, Tier 1 capital to risk-weighted assets ratio was 12.16% and Tier 1 capital to average asset ratio was 11.82%. MB Financial Bank was categorized as “Well-Capitalized” at September 30, 2014 under the regulations of the Office of the Comptroller of the Currency.

Non-GAAP Financial Information

This report contains certain financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (GAAP). These measures include net interest income on a fully tax equivalent basis and net interest margin on a fully tax equivalent basis. Our management uses these non-GAAP measures, together with the related GAAP measures, in its analysis of our performance and in making business decisions. Management also uses these measures for peer comparisons. The tax equivalent adjustment to net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a 35% tax rate. Management believes that it is a standard practice in the banking industry to present net interest income and net interest margin on a fully tax equivalent basis, and accordingly believes that providing these measures may be useful for peer comparison purposes. These disclosures should not be viewed as substitutes for the results determined to be in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of net interest income on a fully tax equivalent basis to net interest income and net interest margin on a fully tax equivalent basis to net interest margin are contained in the tables under “Net Interest Margin.”

Forward-Looking Statements

When used in this Quarterly Report on Form 10-Q and in other documents filed or furnished with the Securities and Exchange Commission, in press releases or other public shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “believe,” “will,” “should,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “plans,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date made. These statements may relate to MB Financial, Inc.’s future financial performance, strategic plans or objectives, revenues or earnings projections, or other financial items. By their nature, these statements are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the statements.

Important factors that could cause actual results to differ materially from the results anticipated or projected include, but are not limited to, the following: (1) expected revenues, cost savings, synergies and other benefits from the recently completed MB Financial-Taylor Capital merger and our other merger and acquisition activities might not be realized within the anticipated time frames or at all, and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected; (2) the possibility that the expected benefits of the other acquisition transactions we previously completed will not be realized; (3) the credit risks of lending activities, including changes in the level and direction of

loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses, which could necessitate additional provisions for loan losses, resulting both from loans we originate and loans we acquire from other financial institutions; (4) results of examinations by the Office of Comptroller of Currency, the Federal Reserve Board, the Consumer Financial Protection Bureau and other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for loan losses or write-down assets; (5) competitive pressures among depository institutions; (6) interest rate movements and their impact on customer behavior, net interest margin and the value of our mortgage servicing rights; (7) the possibility that our mortgage banking business may increase volatility in our revenues and earnings and the possibility that the profitability of our mortgage banking business could be significantly reduced if we are unable to originate and sell mortgage loans at profitable margins or if changes in interest rates negatively impact the value of our mortgage servicing rights; (8) the impact of repricing and competitors’ pricing initiatives on loan and deposit products; (9) fluctuations in real estate values; (10) the ability to adapt successfully to technological changes to meet customers’ needs and developments in the market-place; (11) our ability to realize the residual values of our direct finance, leveraged, and operating leases; (12) our ability to access cost-effective funding; (13) changes in financial markets; (14) changes in economic conditions in general and in the Chicago metropolitan area in particular; (15) the costs, effects and outcomes of litigation; (16) new legislation or regulatory changes, including but not limited to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and regulations adopted thereunder, changes in capital requirements pursuant to the Dodd-Frank Act and the implementation of the Basel III capital standards, other governmental initiatives affecting the financial services industry and changes in federal and/or state tax laws or interpretations thereof by taxing authorities; (17) changes in accounting principles, policies or guidelines; (18) our future acquisitions of other depository institutions or lines of business; and (19) future goodwill impairment due to changes in our business, changes in market conditions, or other factors.

We do not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date on which the forward-looking statement is made.


Item 3.	Quantitative and Qualitative Disclosures about Market Risk

Market Risk and Asset Liability Management

Market Risk. Market risk is the risk that the market value or estimated fair value of our assets, liabilities, and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that our net income will be significantly reduced by interest rate changes. Market risk is managed operationally in our Treasury Group and is addressed through a selection of funding and hedging instruments supporting balance sheet growth, as well as monitoring our asset investment strategies.

Asset Liability Management. Management and our Treasury Group continually monitor our sensitivity to interest rate changes. It is our policy to maintain an acceptable level of interest rate risk over a range of possible changes in interest rates while remaining responsive to market demand for loan and deposit products. The strategy we employ to manage our interest rate risk is to measure our risk using an asset/liability simulation model. The model considers several factors to determine our potential exposure to interest rate risk, including measurement of repricing gaps, duration, convexity, value at risk, and the market value of portfolio equity under assumed changes in the level of interest rates, shape of the yield curves, and general market volatility. Management controls our interest rate exposure using several strategies, which include adjusting the maturities of securities in our investment portfolio, and limiting fixed rate loans or fixed rate deposits with terms of more than five years. We also use derivative instruments, principally interest rate swaps, to manage our interest rate risk. See Note 15 to the Consolidated Financial Statements.

Interest Rate Risk. Interest rate risk can come in a variety of forms, including repricing risk, yield curve risk, basis risk, and prepayment risk. We experience repricing risk when the change in the average yield of our interest earning assets or average rate of our interest bearing liabilities is more sensitive than the other to changes in market interest rates. Such a change in sensitivity could reflect a number of possible mismatches in the repricing opportunities of our assets and liabilities.

In the event that yields on our assets and liabilities do adjust to changes in market rates to the same extent, we may still be exposed to yield curve risk. Yield curve risk reflects the possibility the changes in the shape of the yield curve could have different effects on our assets and liabilities.

Variable rate assets and liabilities that reprice at similar times, have similar maturities or repricing dates, are based on different indexes still have interest rate risk. Basis risk reflects the possibility that indexes will not move in a coordinated manner.

We hold mortgage-related investments, including mortgage loans and mortgage-backed securities. Prepayment risk is associated with mortgage-related investments and results from homeowners’ ability to pay off their mortgage loans prior to maturity.

We limit this risk by restricting the types of mortgage-backed securities we own to those with limited average life changes under certain interest-rate shock scenarios, or securities with embedded prepayment penalties.

Measuring Interest Rate Risk. As noted above, interest rate risk can be measured by analyzing the extent to which the repricing of assets and liabilities are mismatched to create an interest sensitivity gap. An asset or liability is said to be interest rate sensitive within a specific period if it will mature or reprice within that period. The interest rate sensitivity gap is defined as the difference between the amount of interest earning assets maturing or repricing within a specific time period and the amount of interest bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, therefore, a negative gap would tend to adversely affect net interest income. Conversely, during a period of falling interest rates, a negative gap position would tend to result in an increase in net interest income.

The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at September 30, 2014 that we anticipate, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined based on the earlier of the term to repricing or the term to repayment of the asset or liability. The table is intended to provide an approximation of the projected repricing of assets and liabilities at September 30, 2014 based on contractual maturities and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be reinvested and/or repriced because of contractual amortization and rate adjustments on adjustable-rate loans. Loan and investment securities’ contractual maturities and amortization reflect expected prepayment assumptions. While NOW, money market and savings deposit accounts have adjustable rates, it is assumed that the interest rates on some of the accounts will not adjust immediately to changes in other interest rates.

Therefore, the information in the table is calculated assuming that NOW, money market and savings deposits will reprice as follows: 4%, 10%, and 6%, respectively, in the first three months, 11%, 26%, and 15%, respectively, in the next nine months, 52%, 58%, and 57%, respectively, from one year to five years, and 33%, 6%, and 22%, respectively over five years (dollars in thousands):



	Time to Maturity or Repricing
	0 – 90			91 - 365			1 – 5			Over 5
	Days			Days			Years			Years			Total
Interest Earning Assets:
Interest earning deposits with banks	$	178,219		$	—		$	1,172		$	—		$	179,391
Investment securities	225,669			286,134			1,489,061			838,704			2,839,568
Loans held for sale	553,627			—			—			—			553,627
Loans, including covered loans	4,173,493			1,697,174			3,022,772			89,578			8,983,017
Total interest earning assets	$	5,131,008		$	1,983,308		$	4,513,005		$	928,282		$	12,555,603
Interest Bearing Liabilities:
NOW and money market deposit accounts	$	291,925		$	795,583		$	2,298,522		$	811,136		$	4,197,166
Savings deposits	51,053			143,916			529,324			207,692			931,985
Time deposits	658,105			1,209,398			421,515			12,825			2,301,843
Short-term borrowings	460,332			59,750			133,289			13,789			667,160
Long-term borrowings	3,944			11,072			60,144			2,109			77,269
Junior subordinated notes issued to capital trusts	185,681			—			—			—			185,681
Total interest bearing liabilities	$	1,651,040		$	2,219,719		$	3,442,794		$	1,047,551		$	8,361,104
Rate sensitive assets (RSA)	$	5,131,008		$	7,114,316		$	11,627,321		$	12,555,603		$	12,555,603
Rate sensitive liabilities (RSL)	1,651,040			3,870,759			7,313,553			8,361,104			8,361,104
Cumulative GAP (GAP=RSA-RSL)	3,479,968			3,243,557			4,313,768			4,194,499			4,194,499
RSA/Total assets	35.37		%	49.04		%	80.16		%	86.55		%	86.55		%
RSL/Total assets	11.38			26.68			50.42			57.64			57.64
GAP/Total assets	23.99			22.36			29.74			28.92			28.92
GAP/RSA	67.82			45.59			37.10			33.41			33.41

Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets may lag behind changes in market rates. Additionally, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Therefore, we do not rely on a gap analysis to manage our interest rate risk, but rather we use what we believe to be the more reliable simulation model relating to changes in net interest income.

Based on simulation modeling which assumes gradual changes in interest rates over a one-year period, we believe that our net interest income would change due to changes in interest rates as follows (dollars in thousands):



Gradual	Changes in Net Interest Income Over One Year Horizon
Changes in	September 30, 2014					December 31, 2013
Levels of	Dollar			Percentage		Dollar			Percentage
Interest Rates	Change			Change		Change			Change
+ 2.00%	$	18,686		4.40	%	$	10,596		3.84	%
+ 1.00%	8,001			1.88		5,554			2.01
- 1.00%	(10,671		)	(2.51	)	(6,553		)	(2.38	)

In the interest rate sensitivity table above, changes in net interest income between September 30, 2014 and December 31, 2013 reflect changes in the composition of interest earning assets and interest bearing liabilities, related interest rates, repricing frequencies, and the fixed or variable characteristics of the interest earning assets and interest bearing liabilities. The changes in net interest income incorporate the impact of loan floors as well as shifts from low cost deposits to higher cost certificates of deposit in a rising rate environment.

The assumptions used in our interest rate sensitivity simulation discussed above are inherently uncertain and, as a result, the simulations cannot precisely measure net interest income or precisely predict the impact of changes in interest rates on net interest income. Our model assumes that a portion of our variable rate loans that have minimum interest rates will remain in our portfolio regardless of changes in the interest rate environment. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies.


Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures: An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”)) was carried out as of September 30, 2014 under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management. Our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2014, our disclosure controls and procedures were effective in ensuring that the information we are required to disclose in the reports we file or submit under the Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control Over Financial Reporting: During the quarter ended September 30, 2014, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We do not expect that our disclosure controls and procedures and internal control over financial reporting will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION


Item 1.	Legal Proceedings

We are involved from time to time as plaintiff or defendant in various legal actions arising in the normal course of our businesses. While the ultimate outcome of pending proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with counsel representing us in such proceedings, that the resolution of these proceedings should not have a material adverse effect on our consolidated financial position or results of operation.


Item 1A.	Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2013, except for the following:

Dependence on our mortgage business may increase volatility in our consolidated revenues and earnings and our residential mortgage lending profitability could be significantly reduced if we are not able to originate and sell mortgage loans at profitable margins.

We significantly increased our mortgage business as a result of our acquisition of Taylor Capital’s mortgage business in the Taylor Capital merger. As a result of the factors set forth below with respect to our mortgage business, we could experience significant volatility in our consolidated revenue and consolidated net income available for common stockholders.

Mortgage production, especially refinancing, generally declines in rising interest rate environments. While we experienced historically low interest rates in recent years, interest rates began to rise in 2013. Accordingly, if interest rates rise further, or even if they do not, there can be no assurance that our mortgage production will continue at current levels. Because we sell a substantial portion of the mortgage loans we originate, the profitability of our mortgage banking operations depends in large part upon our ability to aggregate a high volume of loans and sell them in the secondary market at a gain. Thus, in addition to the interest rate environment, our mortgage business is dependent upon (i) the existence of an active secondary market and (ii) our ability to profitably sell loans into that market.

Our ability to sell mortgage loans readily is dependent upon the availability of an active secondary market for single-family mortgage loans, which in turn depends in part upon the continuation of programs currently offered by the government sponsored enterprises ("GSEs") and other institutional and non-institutional investors. These entities account for a substantial portion of the secondary market in residential mortgage loans. Because the largest participants in the secondary market are GSEs whose activities are governed by federal law, any future changes in laws that significantly affect them could, in turn, materially and adversely affect us. The impact on us of existing proposals to reform Fannie Mae and Freddie Mac, which were placed into conservatorship in 2008, is difficult to predict. In addition, our ability to sell mortgage loans readily is dependent upon our ability to remain eligible for the programs offered by GSEs and other market participants. Our ability to remain eligible to originate and securitize government insured loans may also depend on our having an acceptable delinquency ratio for Federal Housing Administration loans relative to our peers.

Any significant impairment of our eligibility to participate in the programs offered by the GSEs could materially and adversely affect us. Further, the criteria for loans to be accepted under such programs may be changed from time-to-time by the sponsoring entity which could result in a lower volume of corresponding loan originations or other administrative costs.

Changes in interest rates may change the value of our mortgage servicing rights ("MSRs") portfolio which may increase the volatility of our earnings.

As a result of our mortgage servicing business, we have a sizable portfolio of MSRs. An MSR is the right to service a mortgage loan - collect principal, interest and escrow amounts - for a fee. We invest in MSRs to support mortgage banking strategies and diversify revenue streams from our mortgage banking segment.

We measure and carry all of our residential MSRs using the fair value measurement method. Fair value is determined as the present value of estimated future net servicing income, calculated based on a number of variables, including assumptions about the likelihood of prepayment by borrowers.

The primary risk associated with MSRs is that in a declining interest rate environment, they will likely lose a substantial portion of their value as a result of higher than anticipated prepayments. Moreover, if prepayments are greater than expected, the cash we receive over the life of the mortgage loans would be reduced. Conversely, these assets generally increase in value in a rising interest rate environment to the extent that prepayments are slower than previously estimated. Although we invest in MSRs to diversify the revenue streams from our mortgage banking segment, the increasing size of our MSR portfolio may increase our interest rate risk and correspondingly, the volatility of our earnings, especially if we cannot adequately hedge the interest rate risk relating to our MSRs.

At September 30, 2014, our MSRs had a fair value of approximately $249.4 million. Changes in fair value of our MSRs are recorded to earnings in each period. Depending on the interest rate environment, it is possible that the fair value of our MSRs may

be reduced in the future. If such changes in fair value significantly reduce the carrying value of our MSRs, our financial condition and results of operations would be negatively affected.

The Basel III Rule constrains the inclusion of MSRs in capital and requires deductions from Common Equity Tier 1 Capital in the event such assets exceed a certain percentage of a bank’s Common Equity Tier 1 Capital.

Certain hedging strategies that we use to manage investment in MSRs, mortgage loans held for sale and interest rate lock commitments may be ineffective to offset any adverse changes in the fair value of these assets due to changes in interest rates and market liquidity.

We use derivative instruments to hedge MSRs, mortgage loans held for sale and interest rate lock commitments to offset changes in fair value resulting from changing interest rate environments. Our hedging strategies are highly susceptible to prepayment risk, basis risk, market volatility and changes in the shape of the yield curve, among other factors. In addition, hedging strategies rely on assumptions and projections regarding assets and general market factors. If these assumptions and projections prove to be incorrect or our hedging strategies do not adequately mitigate the impact of changes in interest rates, we may incur losses that would adversely impact earnings.

Our mortgage loan repurchase reserve for losses could be insufficient.

We currently maintain a repurchase reserve, which is a liability on our consolidated balance sheets, to reflect our best estimate of expected losses that we will incur on loans that we have sold or securitized into the secondary market and must subsequently repurchase or with respect to which we must indemnify the purchasers and insurers because of violations of customary representations and warranties. Increases to this reserve for current loan sales reduce mortgage banking revenue. The level of the reserve reflects management's continuing evaluation of loss experience on repurchased loans, indemnifications and present economic conditions, as well as the actions of loan purchasers and guarantors. The determination of the appropriate level of the mortgage loan repurchase reserve inherently involves a high degree of subjectivity and requires us to make estimates of repurchase risks and expected losses subsequently experienced. Both the assumptions and estimates used could be inaccurate, resulting in a level of reserve that is less than actual losses. If additional reserves are required, it could have a material adverse effect on our business, financial condition and results of operations.

A significant increase in certain loan balances associated with our mortgage business may result in liquidity risk related to the funding of these loans.

The held for sale loan balance in our mortgage business represents mortgage loans that are in the process of being sold to various investors. Loan balances steadily accumulate and then decrease at the time of sale. We fund these balances through short term funding, primarily through Federal Home Loan Bank ("FHLB") advances, which require collateral. In the event that we experience a significant increase in our held for sale loan balances, our liquidity could be negatively impacted as we increase our short term borrowings and therefore our required collateral. Although we have access to other sources of contingent liquidity, we could be materially and adversely affected if we fail to effectively manage this risk.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth information for the three months ended September 30, 2014 with respect to our repurchases of our outstanding common shares:



	Total Number of Shares Purchased (1)	Average Price Paid per Share		Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1, 2014 — July 31, 2014	50,500	$	27.77	—	1,000,000
August 1, 2014 — August 31, 2014	28,540	28.23		—	1,000,000
September 1, 2014 — September 30, 2014	517	28.32		—	1,000,000
Total	79,557	$	27.94	—

(1) Represents shares withheld to satisfy tax withholding obligations upon the exercise of stock options and vesting of restricted stock awards.

In the fourth quarter of 2012, the Company's Board of Directors authorized the Company to purchase up to one million shares of common stock from time to time over the next two years, subject to market conditions and other factors.


Item 6.	Exhibits

See Exhibit Index.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MB FINANCIAL, INC.

(registrant)



Date:	November 10, 2014	By:	/s/Mitchell Feiger
			Mitchell Feiger
			President and Chief Executive Officer
			(Principal Executive Officer)

Date:	November 10, 2014	By:	/s/Jill E. York
			Jill E. York
			Vice President and Chief Financial Officer
			(Principal Financial and Principal Accounting Officer)



EXHIBIT INDEX
Exhibit Number		Description

2.1		Agreement and Plan of Merger, dated as of July 14, 2013, by and among the Registrant and Taylor Capital Group, Inc. (incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on July 18, 2013 (File No.0-24566-01))

2.2		Amendment, dated as of June 30, 3014, to Agreement and Plan of Merger, dated as of July 14, 2013, by and between the Registrant and Taylor Capital Group, Inc. (incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on July 1, 2014 (File No.0-24566-01))

2.3		Letter Agreement, dated as of June 30, 3014, by and between the Registrant and Taylor Capital Group, Inc. (incorporated herein by reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K filed on July 1, 2014 (File No.0-24566-01))

2.4		Agreement and Plan of Merger, dated as of May 1, 2006, by and among the Registrant, MBFI Acquisition Corp. and First Oak Brook Bancshares, Inc. (“First Oak Brook”)(incorporated herein by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on May 2, 2006 (File No.0-24566-01))

2.5		Purchase and Assumption Agreement among Federal Deposit Insurance Corporation, Receiver of Corus Bank, National Association, Chicago, Illinois, Federal Deposit Insurance Corporation and MB Financial Bank, N.A., dated as of September 11, 2009 (incorporated herein by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on September 17, 2010 (File No.0-24566-01))

2.6		Purchase and Assumption Agreement among Federal Deposit Insurance Corporation, Receiver of Broadway Bank, Chicago, Illinois, Federal Deposit Insurance Corporation and MB Financial Bank, N.A., dated as of April 23, 2010 (incorporated herein by reference to Exhibit 2.6 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (File No. 0-24566-01))

2.7		Purchase and Assumption Agreement among Federal Deposit Insurance Corporation, Receiver of New Century Bank, Chicago, Illinois, Federal Deposit Insurance Corporation and MB Financial Bank, N.A., dated as of April 23, 2010 (incorporated herein by reference to Exhibit 2.7 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (File No. 0-24566-01))

3.1		Charter of the Registrant, as amended

3.1A		Articles Supplementary to the Charter of the Registrant for the Registrant’s Perpetual Non-Cumulative Preferred Stock, Series A (incorporated herein by reference to Exhibit 3.3 to the Registrant’s Registration Statement on Form 8-A filed on August 14, 2014 (File No.001-36599))

3.2		Bylaws of the Registrant, as amended (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on April 2, 2012 (File No. 0-24566-01))

4.1		The Registrant hereby agrees to furnish to the Commission, upon request, the instruments defining the rights of the holders of each issue of long-term debt of the Registrant and its consolidated subsidiaries



EXHIBIT INDEX
Exhibit Number		Description

10.1		Letter Agreement, dated as of December 5, 2008, between the Registrant and the United States Department of the Treasury (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 8, 2008 (File No.0-24566-01))

10.2		Amended and Restated Employment Agreement between the Registrant and Mitchell Feiger (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))

10.3		Employment Agreement between MB Financial Bank, N.A. and Burton J. Field (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (File No. 0-24566-01))

10.4		Form of Change and Control Severance Agreement between MB Financial Bank, National Association and Jill E. York (incorporated herein by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))

10.4B		Form of Change and Control Severance Agreement between MB Financial Bank, National Association and each of Burton Field, Larry J. Kallembach, Brian Wildman, Rosemarie Bouman and Susan Peterson (incorporated herein by reference to Exhibit 10.4B to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))

10.4C		Form of Change in Control Severance Agreement between MB Financial Bank, National Association and each of Mark A. Heckler and Edward F. Milefchik (incorporated herein by reference to Exhibit 10.4C to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 (File No. 0-24566-01))

10.4D		Form of Change in Control Severance Agreement between MB Financial Bank, National Association and each of Randall T. Conte, Michael J. Morton, Lawrence G. Ryan and Michael D. Sharkey

10.5		Form of Letter Agreement dated December 4, 2008 between MB Financial, Inc. and each of Mitchell Feiger, Jill E. York, Burton Field, Larry J. Kallembach, Brian Wildman, Rosemarie Bouman, and Susan Peterson relating to the TARP Capital Purchase Program (incorporated herein by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))

10.5A		Form of Compensation Amendment and Waiver Agreement under the TARP Capital Purchase Program between MB Financial, Inc. and certain employees (incorporated herein by reference to Exhibit 10.5A to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 (File No. 0-24566-01))

10.5B		Form of Compensation Amendment and Waiver Agreement under the TARP Capital Purchase Program between MB Financial, Inc. and each of Mark A. Heckler and Edward F. Milefchik (incorporated herein by reference to Exhibit 10.5B to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 (File No. 0-24566-01))

10.7		MB Financial, Inc. Third Amended and Restated Omnibus Incentive Plan (the “Omnibus Incentive Plan”) (incorporated herein by reference to Appendix A to the Registrant’s definitive proxy statement filed on April 11, 2014 (File No. 0-24566-01))



EXHIBIT INDEX
Exhibit Number		Description

10.8		MB Financial Stock Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))

10.9		MB Financial Non-Stock Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))

10.10		Avondale Federal Savings Bank Supplemental Executive Retirement Plan Agreement (incorporated herein by reference to Exhibit 10.2 to the Annual Report on Form 10-K of MB Financial, Inc., a Delaware corporation (then known as Avondale Financial Corp.) for the year ended December 31, 1996 (File No. 0-24566))

10.11		Agreement Regarding Salary Adjustment and Portion of Salary Payable by Stock, dated as of December 21, 2009, between MB Financial, Inc. and Mitchell Feiger (incorporated herein by reference to Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 0-24566-01))

10.11A		Form of Agreement Regarding Salary Adjustment and Portion of Salary Payable by Stock between MB Financial, Inc. and Rosemarie Bouman, Burton J. Field, Mark A. Heckler, Larry J. Kallembach, Edward F. Milefchik, Susan G. Peterson and Brian J. Wildman (incorporated herein by reference to Exhibit 10.11A to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 (File No. 0-24566-01))

10.12		Agreement Regarding Salary Adjustment and Portion of Salary Payable by Stock, dated as of December 21, 2009, between MB Financial, Inc. and Jill E. York (incorporated herein by reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 0-24566-01))

10.13		Amended and Restated Employment Agreement between MB Financial Bank, N.A. and Ronald D. Santo (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on December 14, 2004 (File No. 0-24566-01))

10.13A		Amendment to Amended and Restated Employment Agreement between MB Financial Bank, N.A. and Ronald D. Santo ((incorporated herein by reference to Exhibit 10.13A to the Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2006, filed on March 2, 2007 (File No. 0-24566-01))

10.15		Tax Gross Up Agreements between the Registrant and each of Mitchell Feiger, Burton J. Field, Jill E. York, Larry J. Kallembach, Brian Wildman, and Susan Peterson (incorporated herein by reference to Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))

10.15A		Tax Gross Up Agreement between the Registrant and Rosemarie Bouman (incorporated herein by reference to Exhibit 10.15A to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))

10.16		Form of Incentive Stock Option Agreement for Executive Officers under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.16 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (File No. 0-24566-01))



EXHIBIT INDEX
Exhibit Number		Description

10.17		Form of Non-Qualified Stock Option Agreement for Directors under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.16 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (File No. 0-24566-01))

10.18		Form of Restricted Stock Agreement for Executive Officers under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.16 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (File No. 0-24566-01))

10.18A		Amendment to Form of Incentive Stock Option Agreement and Form of Restricted Stock Agreement for Executive Officers under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.18A to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 0-24566-01))

10.18B		Form of Performance-Based Restricted Stock Agreement for Executive Officers under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.18B to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 (File No. 0-24566-01))

10.18C		Form of Restricted Stock Agreement for grants on December 2, 2009 to Mitchell Feiger, Jill E. York and Burton J. Field (incorporated herein by reference to Exhibit 10.18C to the Registrant’s Current Report on Form 8-K filed on December 7, 2009 (File No. 0-24566-01))

10.19		Form of Restricted Stock Agreement for Directors under the Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.16 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (File No. 0-24566-01))

10.20		First Oak Brook Bancshares, Inc. Incentive Compensation Plan (incorporated herein by reference to Appendix A to the definitive proxy statement filed by First Oak Brook on March 30, 2004 (File No. 0-14468))

10.20A		Amendment to First Oak Brook Bancshares, Inc. Incentive Compensation Plan ((incorporated herein by reference to Exhibit 10.20A to the Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2006, filed on March 2, 2007 (File No. 0-24566-01))

10.21		First Oak Brook Bancshares, Inc. 2001 Stock Incentive Plan (incorporated herein by reference to Appendix A to the definitive proxy statement filed by First Oak Brook on April 2, 2001 (File No. 0-14468))

10.21A		Amendment to First Oak Brook Bancshares, Inc. 2001 Stock Incentive Plan ((incorporated herein by reference to Exhibit 10.21A to the Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2006, filed on March 2, 2007 (File No. 0-24566-01))

10.22		First Oak Brook Bancshares, Inc. Directors Stock Plan (incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form S-8 filed by First Oak Brook on October 25, 1999 (File No. 333-89647))

10.22A		Amendment to First Oak Brook Bancshares, Inc. Directors Stock Plan (incorporated herein by reference to Exhibit 10.22A to the Registrant’s Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2007 filed on May 15, 2007 (File No. 0-24566-01))

10.23		Letter Agreement, dated as of June 30, 2014, by and among the Registrant and certain principal stockholders of Taylor Capital Group, Inc. (incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on July 1, 2014 (File No.0-24566-01))



EXHIBIT INDEX
Exhibit Number		Description

10.23A		Supplemental Agreement, dated as of August 15, 2014, by and among the Registrant, MB Financial Bank, N.A., and Jennifer W. Steans, as representative of certain principal stockholders of Taylor Capital Group, Inc. (incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on August 20, 2014 (File No.001-36599))

10.23B		Escrow Agreement, dated as of August 15, 2014, by and among MB Financial Bank, N.A., Jennifer W. Steans, as representative of certain principal stockholders of Taylor Capital Group, Inc., and The Northern Trust Company, as escrow agent (incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K filed on August 20, 2014 (File No.001-36599))

10.24		Employment Agreement, dated as of July 14, 2013 by and between the Registrant, MB Financial Bank, N.A. and Mark A. Hoppe (included as Exhibit E to the Agreement and Plan of Merger, dated as of July 14, 2013, by and between the Registrant and Taylor Capital Group, Inc. (incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed on July 18, 2013 (File No.0-24566-01)))

10.25		Taylor Capital Group, Inc. Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.1 to the Annual Report on Form 10-K of Taylor Capital Group, Inc. for the year ended December 31, 2008 (File No. 000-50034))

10.25A		Trust Under Taylor Capital Group, Inc. Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.17 of the Registration Statement on Form S-1 of Taylor Capital Group, Inc. filed May 24, 2002 (Registration No. 333-89158))

10.25B		Amendment to the Taylor Capital Group, Inc. Deferred Compensation Plan

10.26		Taylor Capital Group, Inc. Senior Officer Change in Control Severance Plan (incorporated herein by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q of Taylor Capital Group, Inc. for the quarterly period ended June 30, 2009 (File No. 000-50034))

10.26A		Amendment to the Taylor Capital Group, Inc. Senior Officer Change in Control Severance Plan

10.27		First Oak Brook Bancshares, Inc. Executive Deferred Compensation Plan (incorporated by reference to Exhibit 10.3 to First Oak Brook’s Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 0-14468))

10.27A		Amendment to First Oak Brook Bancshares, Inc. Executive Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.27A to the Registrant’s Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2007 filed on May 15, 2007)

10.29		Form of Transitional Employment Agreement between the Registrant (as successor to First Oak Brook) and Rosemarie Bouman (incorporated herein by reference to Exhibit 10.10 to First Oak Brook’s Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 0-14468))

10.29A		First Amendment to Transitional Employment Agreement between the Registrant (as successor to First Oak Brook) and Rosemarie Bouman ((incorporated herein by reference to Exhibit 10.28A to the Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2006, filed March 2, 2007 (File No. 0-24566-01))



EXHIBIT INDEX
Exhibit Number		Description

10.29B		Second Amendment to Transitional Employment Agreement between the Registrant (as successor to First Oak Brook) and Rosemarie Bouman ((incorporated herein by reference to Exhibit 10.28B to the Registrant’s Annual Report on Form 10-K/A for the year ended December 31, 2006, filed March 2, 2007 (File No. 0-24566-01))

10.30		Form of Performance Share Unit Award Agreement (incorporated herein by reference to Exhibit 10.30 to the Registrant's Current Report on Form 8-K filed on September 5, 2012 (File No. 0-24566-01))

10.31		Form of Incentive Stock Option Agreement (Management Committee) (incorporated herein by reference to Exhibit 10.31 to the Registrant's Current Report on Form 8-K filed on September 5, 2012 (File No. 0-24566-01))

10.32		Form of Restricted Stock Agreement (Management Committee) (incorporated herein by reference to Exhibit 10.32 to the Registrant's Current Report on Form 8-K filed on September 5, 2012 (File No. 0-24566-01))

10.32A		Form of Restricted Stock Unit Agreement (Management Committee) (incorporated herein by reference to Exhibit 10.32A to the Registrant's Current Report on Form 8-K filed on September 5, 2012 (File No. 0-24566-01))

31.1		Rule 13a — 14(a)/15d — 14(a) Certification (Chief Executive Officer)*

31.2		Rule 13a — 14(a)/15d — 14(a) Certification (Chief Financial Officer)*

32		Section 1350 Certifications*

101		The following financial statements from the MB Financial, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in Extensive Business Reporting Language (XBRL): (i) consolidated balance sheets, (ii) consolidated statements of operations, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of cash flows and (v) the notes to consolidated financial statements*

* Filed herewith